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Слайды и текст к этой презентации:
№3 слайд
Содержание слайда: Introduction
Lecture 4-5: Sequential games.
Games where players move one after another. Sequential games are asymmetric.
Games we play: chess
Games businesses play: entry, pricing…
L4: Subgame perfect equilibrium.
L5: Experimental evidence, and an application to bargaining.
№4 слайд
Содержание слайда: Sequential games
Looking forward: Players, when make moves, have to consider how other players will react.
Reasoning backward: Given other players’ reaction, what is my optimal strategy?
Asymmetry in order of play causes asymmetry in payoffs. It matters who plays first and who plays second.
№8 слайд
Содержание слайда: Solving the Game Tree
Subgame: any node with all subsequent nodes:
Subgame perfect equilibrium (SPE):
The SPE is the equilibrium in sequential games.
The SPE is such that players' strategies constitute a Nash equilibrium in every subgame of the original game
Start with terminal nodes and eliminate dominated actions from the game
№10 слайд
Содержание слайда: Discussion
Compared to the simultaneous version of the game,
Firm 1 can obtain the outcome that yields the highest payoff (3), whereas Firm 2 obtains a low payoff (0)
First-mover advantage:
Ability to commit oneself to an advantageous position
Firm 1 benefits from taking an irreversible action
Note: not all games have a first-mover advantage
e.g. some bargaining games may have a second-mover advantage (see lecture 5).
№11 слайд
Содержание слайда: Sequential games and oligopoly
Cournot model of oligopoly:
Simultaneous game.
Producers have market power (profits>0), but less than the monopolist.
Producers would be better off if they could cooperate (e.g. OPEC oil cartel), however cooperation is not a stable outcome.
Decisions of how much to produce can also be sequential Stackelberg model of oligopoly
№19 слайд
Содержание слайда: The Stackelberg model
Note that the equilibrium is not on Firm 1’s Cournot best response function.
By playing first, Firm 1 can select the point on Firm 2’s best response function that maximizes its own payoff
First-mover advantage: By committing to a high quantity, Firm 1 can force Firm 2 to produce a low quantity.
The first-mover has the advantage because his action is irreversible. The Stackelberg leader is the player that makes an irreversible decision first.
№21 слайд
Содержание слайда: Stackelberg in the pharmaceutical industry
Patents for new drugs last up to 20-30 years. During the patent period, the firm that invented the drug has a monopoly and can sell the drug at a high price.
Once the patent expires, anyone is allowed to produce generic version of drug and sell at a low price.
Just before the patent expires, brand name pharmaceutical companies enter into the generic drug competition by marketing their brand name drug with a pseudo-generic label before the generic drug manufacturers can enter the generic market.
This allows the pseudo-generic drug to attain most of the market share and establish itself as the market leader.
№26 слайд
Содержание слайда: Entry game with incumbent
Suppose that Pepsi (the incumbent) is already in the local market, and Coca-Cola is deciding whether to Enter or stay Out.
Pepsi: adopt a Tough defensive response or Acquiesce.
Tough: increase production, fight on prices, advertising campaign etc.
Acquiesce: no aggressive commercial war with Coca-Cola
№29 слайд
Содержание слайда: Entry game with incumbent
Coca-Cola looks at Pepsi's Tough play and should choose to go Out of the market since it then only loses -$1. If Coca-Cola sees Pepsi Acquiesce then it should itself Acquiesce and earn $1.
Pepsi knows that when it plays Tough Coca-Cola will exit. Its best choice is to act Tough to force Coca-Cola to go Out.
Coca-Cola reasons backwards: if it enters, then Pepsi will play Tough and the best response is to go Out. Hence, Coca-Cola’s best play is to Stay Out since it loses 0 instead of -1.
№30 слайд
Содержание слайда: Strategic moves
Players are rational and know how the game will be played and the subsequent payoff. What can player do to alter the predicted outcome?
Strategic moves: Commitment/threat/promise
Commitment: Commit to take a particular decision unconditionally on the other player’s action.
Having fewer choices is typically worse than having many choices. In sequential games, however, having fewer choices can actually increase your payoff.
№34 слайд
Содержание слайда: Credible strategic move
How to make a credible strategic move?
Binding contract between Pepsi and retailers.
We will sell you Pepsi at a lower price than Coca-Cola does.
“Tough” becomes credible.
Decide to expand capacity, in order to reduce the marginal costs of increasing quantity.
Keep innovating, in order to commit to improve quality and deter entry.
№35 слайд
Содержание слайда: Credible strategic move
How to make a credible strategic move?
Pepsi can also make threat credible by acquiring a reputation for toughness. By being tough towards potential entrants today, it may deter other firms from entering.
Being tough is not subgame perfect, however the entrant may think the incumbent will be tough if he has such a reputation.
If a threat is credible, other firms won’t enter, and the threat to be tough is never materialized.
№36 слайд
Содержание слайда: Credible strategic move
How to make a credible strategic move?
Polaroid instant photography
Refused to diversify out of its core business. With all its chips in instant photography, it was committed to fight against any intruder in the market.
In 1976, after 28 years of a Polaroid monopoly on the instant photography market, Kodak entered the fray.
Edwin Land, Polaroid founder:
“This is our very soul we are involved with. This is our whole life…We will stay in our lot and protect that lot.”
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