Post on 18-Dec-2015
transcript
Managerial EconomicsJack Wu
Nov. 16: Coca-Cola raised price 7% Nov. 22: Pepsi raised price 6.9% “Coke and Pepsi will move now
from price-based competition to marketing-based competition”,
Andrew Conway, Morgan Stanley
Coke vs. Pepsi, 1999
Competitive DilemmaPepsi
Raise price Discount
Raise price
C: 3, P: 3
C: 0, P: 5
Coke Discount C: 5,
P: 0 C: 1, P: 1
What should Coke do?
Strategic Situationsparties actively consider the interactions with
one another in making decisionsgame theory -- set of ideas and principles to
guide strategic thinkingsimultaneous actions: strategic formsequential actions: extensive form
Dominated Strategygenerates worse consequences than another strategy, regardless of the choices of the other parties
never use dominated strategy
Nash EquilibriumGiven that the other players choose their Nash equilibrium strategies, each party prefers its own Nash equilibrium strategy
• No one is willing to deviate unilaterally from a Nash equilibrium
Solving for Nash Equilibriumeliminate dominated strategies, then check
remaining cells“arrow” technique
Coke and Pepsi GameNash equilibrium: for both parties, “raise
price” is dominated by “discount”. but discounting is bad for both -- if only they
could agree somehow to raise price. Coke and Pepsi stuck in this situation for four
years until November 1999.
Radio FormatsMerkur
Lite AC no change
Jupiter
Hot AC J: 60,
M: 40
J: 60,
M: 40
no change J: 70,
M: 30
J: 50,
M: 50
Radio FormatsFor Merkur, “Lite AC” is dominated by “no
change”; so consider only “no change”, assuming Merkur chooses “no change”,
Jupiter should choose “Hot AC”.
Repeat using “arrow technique”.
Out of Nash EquilibriumWhat if another player doesn’t play Nash equilibrium strategy? Nash equilibrium strategy may not be best still don’t use dominated strategy
No Nash equilibrium in pure strategies
Competitor.com
NBA NHL
NBA W: 4, C: 3
W: 3, C: 4
We.com NHL W: 3,
C: 4 W: 4, C: 3
Where to advertise?
Randomized Strategieschoose among pure strategies according to
probabilitiesmust be unpredictableExample: retail market random discountExample: where to advertise_ We.com: ½ NBA and ½ NHL_ Competitor.com: ½ NBA and ½ NHL
Evening News:
TVB
7:30pm 8:0pm
7:30pm A: 1, B: 1
A: 3, B: 4
ATV 8:0pm A: 4, B: 3
A: 2.5, B: 2.5
Coordination and CompetitionPrime time for news is 8:0pm; second best is
7:30pm; since audience is limited, get maximum
viewership if two channels schedule at different times.
Question: which station gets 8:0pm? Situation has elements of
coordination -- avoiding same time slot competition -- getting the 8:0pm slot
Zero/Positive Sumzero-sum games: pure competition -- one
party better off only if other is worse offpositive-sum games: coordination -- both can
be better off or both worse offco-opetition: competition and coordination
Adopting Database SoftwareSol
IBM Oracle
Venus
IBM V: 1.5,
S: 1.5
V: 1,
S: 1
Oracle V: 1,
S: 1
V: 1.5,
S: 1.5
Focal PointNash equilibriummultiple Nash equilibria
SequencingGame in extensive form – sequence of moves:
nodesbranchesoutcomes
Extensive Form: Equilibriumbackward induction
final nodes intermediate nodes initial node
TVB
ATV
ATV
4, 3
2.5, 2.5
1, 1
3, 4
8:00
7:30
7:30
8:00
7:30
8:00
TVB, ATV
TV News: Sequential Moves
Strategic MoveAction to influence beliefs or actions of other parties in a favorable way
•credibility– first mover advantage– second mover advantage
Examples Examples: Evening TV news -- both stations want to move first: which one can?
Use strategic move, eg, contracts with advertisers to deliver news at 8pm.
Famous Chinese general: after crossing a river, burnt his ships -- strategic move to force soldiers to fight harder.
Issue: Is the move credible? Will it convince the other players?
Advantage doesn’t always go to first mover; In war, better to see opponent’s move, and then take action, eg is enemy
moving south or north? new product category -- let competitor test the market and educate the
customers
consumer
Litho
LithoMake prints
Do not
Buy
Do not
Make more prints
Do not
(1) serial number (2) destroying the plate(3) other solution?
Lithographer
Conditional Strategic Movesthreatspromises
Morgan Stanley:“Shareholder rights plan”
If any party acquires 15% or more of company’s shares, other shareholders get right to buy additional shares at 50% discount. Impact on hostile bidder?
Shareholder Rights PlanThis shareholder rights plan is a threat to
potential bidders: most hostile bidders begin with small stake; with shareholder rights plan, if bidder acquires
more than 15%, then rights triggered, and bidder will be diluted.
Nickname: poison pill. Actually works against shareholder rights -- by
entrenching existing management.
Sharon
Hilda
acquires 100,000shares
doesn’t bid
does not
activates rights
Hilda loses on initial stake + cost of takeover rises
Poison Pill
Union
Employer
reject union demand
accept
do not
strike Lose current wageand possibly gain infuture wage
Maintain current wage
Why are strikes rare inAmerican professional football?
Strike
AnswerStrike is a threat: must be credible, otherwise employer will
not raise wage; for threat to be credible, expected gain from strike in future
wage > loss of current wage.
American professional sports: football -- players have very short careers; if they strike for
one season, reduce professional careers by 20-25%. baseball -- long playing careers; strikes more common
depositor
bankmaintains deposit
run
Promise
withdraws deposit
remains solvent n.a.
?