MANAGERIAL DECISION MAKING

B.  Game Theory and Competitive Strategy

1.  Basic elements

a.  Players - two or more participants

b.  Actions - "strategies," choices to be made

c.  Outcomes - consequence of decision made and actions of rivals

d.  Payoffs - monetary or nonmonetary results

e.  Underlying "rules" - govern behavior of competitors

(1)  Competitive practices, laws, regulations

(2)  Framework to model competition - sequential vs. simultaneous actions, move order, etc.

2.  Variations

a.  Number of competitors

(1)  Two-person games

(2)  n-person games

• Multiple interests

• Possibility of coalitions forming

b.  Degree of mutual interest

(1)  Zero-sum games

• What is gained by one player is lost by others => pure conflict

(2)  Non-zero-sum games

• Gains and losses can be different => may be advantageous to cooperate

c.  Communication and agreement among competitors

(1)  Noncooperative games - players able to communicate and coordinate actions

(2)  Cooperative games - communication possible between players, binding agreement on actions

d.  Repeated or one-shot competition

• Is competition ongoing or only one time?

e.  Amount of information competitors have about each other

3.  Concepts

a.  Payoff table

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b.  Dominant strategy

• One strategy optimal regardless of action taken by competitor

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c.  Prisoners' Dilemma

• Players acting in their own best interest (i.e., employing dominant strategy) are worse off than if they had cooperated

Ex. -

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Ex. -

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d.  Nash equilibrium

• Maximize expected payoff based on strategy chosen by other competitors

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e.  Equilibrium strategies

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4.  Competitive strategy

• Decisions sometimes a blend of competition and cooperation

a.  "Battle of the sexes"

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b.  Market entry

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c.  Bargaining

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5.  Sequential competition

• Series of actions over time - moves, countermoves
  
  
• Game tree - include all players' actions

Ex. -

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a.  Backward induction

• Look at end result, determine actions needed to get to desired results

Ex. - Entry deterrence

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• Is threat credible?
  
  
• Limit pricing - lower price to prevent entry

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• Maintain excess capacity

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• Strategic entry barriers - limit pricing, excess capacity, advertising, proliferate brands, product improvements

b.  Forward induction

• Current actions influence future ones
  
  
• Show intent

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• Signalling - strategically reveal information

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6.  Repeated competition

• Game played indefinitely

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a.  Contingent strategies

• Strategy depends on what competitor does

(1)  Punitive strategy

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(2)  Tit-for-tat

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• More forgiving than punitive strategy

b.  Reputation

• Repeated competition allows reputation to be established

Ex. - Quality

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Ex. - Toughness

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7.  Multiple players and evolutionary strategies

• Ex. - Cartels

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• Ex. - Choosing a career

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• Competing standards

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• Bargaining

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