MANAGERIAL ECONOMICS 11th Edition

By PHD. Suongjian Office:Rm1322 Tel:13302336088 Email:suongjian@163.net

PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance Copyright 2008 MGMT Panel, GDUF. All rights reserved.

Game Theory
Chapter 14

PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance

Copyright 2008 MGMT Panel, GDUF. All rights reserved.

Chapter 14 OVERVIEW

Chapter 14 KEY CONCEPTS

Game Theory Basics Prisoners Dilemma Nash Equilibrium Infinitely Repeated Games Finitely Repeated Games Competitive Strategy Pricing Strategies Non-price Competition
PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance Copyright 2008 MGMT Panel, GDUF. All rights reserved.

game theory zero-sum game positive-sum game negative-sum game cooperative game sequential game look ahead and extrapolate back simultaneous-move game equilibrium outcome game-theory strategy payoff matrix Prisoners Dilemma one-shot game repeated game dominant strategy secure strategy Nash equilibrium

randomized strategies Nash bargaining infinitely repeated game finitely repeated game trigger strategy end-of-game problem multistage games first-mover advantage competitive advantage comparative advantage limit pricing predatory pricing customer lock-in effect network externalities market penetration pricing non-price competition

PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance

Copyright 2008 MGMT Panel, GDUF. All rights reserved.

Game Theory Basics

Prisoners Dilemma

Types of Games

Classic Riddle

Zero-sum game: offsetting gains/losses. Positive sum game: potential for mutual gain. Negative-sum game: potential for mutual loss. Cooperative games: joint action is favored. Sequential games: moves in succession. Simultaneous-move game: coincident moves.
PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance Copyright 2008 MGMT Panel, GDUF. All rights reserved.

Rational behavior can give suboptimal result. Rationality can hamper beneficial cooperation. Dominant strategy gives best result regardless of moves by other players. Secure strategy gives best result assuming the worst possible scenario.

Business Application

Role of Interdependence

Broad Implications
PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance Copyright 2008 MGMT Panel, GDUF. All rights reserved.

Strategic Considerations

Nash Equilibrium

Infinitely Repeated Games

Nash Equilibrium Concept

Role of Reputation

Neither player can improve their payoff through a unilateral change in strategy. Nash equilibrium concept is broader than the concept of a dominant strategy equilibrium.

Every dominant strategy equilibrium is also a Nash equilibrium. Nash equilibrium can exist where there is no dominant strategy equilibrium.

Infinitely repeated games occur over and over again without boundary or limit. Firms receive sequential payoffs that shape current and future strategies. Reputations for high quality give consumers confidence for repeat transactions. In a one-shot game, poor quality can fool customers. In an infinitely repeated game, poor quality is shunned by customers.
PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance Copyright 2008 MGMT Panel, GDUF. All rights reserved.

Product Quality Games

Nash Bargaining
PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance Copyright 2008 MGMT Panel, GDUF. All rights reserved.

Finitely Repeated Games

Competitive Strategy

Uncertain Final Period

Basic Concepts

Finitely repeated games have limited duration. With end point uncertainty, a finitely repeated game mirrors an infinitely repeated game. Enforcing end-of-game performance is difficult. Solution: simply extend the game!

Effective competitive strategy involves search for uniquely attractive products. Unique or rare ability to create, distribute, or service products valued by customers. Business-world analog to national comparative advantage. Nimble firms sometimes translate the benefits of small size into a distinct competitive advantage.
PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance Copyright 2008 MGMT Panel, GDUF. All rights reserved.

Competitive Advantage

End-of-game Problem

First-mover Advantages

When Large Size Is a Disadvantage

Benefits earned by the player able to make the initial move in a sequential move or multistage game.
PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance Copyright 2008 MGMT Panel, GDUF. All rights reserved.

Pricing Strategies

Limit Pricing

Pricing strategy to set less than monopoly prices to deter entry by competitors. Limit pricing is a widely adopted means for maintaining lead market positions. Predatory pricing is pricing below marginal cost (rare).

Market Penetration Pricing

Limit pricing is sometimes confused with predatory pricing.

Pricing strategy to charge very low (or zero) initial prices to create a new market or grab market share. Objective is to gain a critical mass of customers, create network effects, and a viable business.
Copyright 2008 MGMT Panel, GDUF. All rights reserved.

PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance

Non-price Competition

Advantages of Non-price Competition

Non-price competition can be an effective means for growing market share and profitability in the face of entrenched rivals. Nonprice competition can be difficult to thwart. Profit-maximizing level of non-price competition is found by setting activity MR = MC. Set MRA = MCA to determine optimal advertising.

Optimal Level of Advertising

Optimal Advertising Example

PowerPoint Presentation by Suong Jian & Liu Yan Guangdong University of Finance Copyright 2008 MGMT Panel, GDUF. All rights reserved.