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Strategic Management/ Business Policy Game Theory and Strategy Power Point Set 6c
Strategic Management/ Business Policy
Game Theory and Strategy
Power Point Set 6c
Game Theory and Strategy
Key Concept: Preemption of Strategically Valuable Assets
Access to raw materials (e.g., Alcoa)
Wal-mart’s rural strategy
Analyzing Competitive Dynamics Commitment Vs. Flexibility
CommitmentGame-theoretic preemption strategy
FlexibilityReal (Strategic) Options Analysis
3
Game Theory and Strategy
Invisible-Hand Game
Row
Wor
k H
ard
Shi r
k
Work Hard Shirk Column
170
140170
140
130 120
120
130
Game Theory and Strategy
Assurance Game
Row
Coop
erat
eD
e fec
t
Cooperate Defect
Column
170
120170
120
100 110
110
100
Game Theory and Strategy
Prisoners’ Dilemma Game
Row
Sile
nce
Fink
Silence Fink Column
-1
0-1
0
-10 -8
-8
-10
Game Theory and Strategy
Prisoners’ Dilemma Game
Row Player: Dominant Strategy: FinkColumn Player: Dominant Strategy: Fink
Dominant Strategy (Nash) Equilibrium: (-8, -8)
Note: It is a dilemma since if they both cooperated by remaining silent: (-1, -1).
-1 0-1
0-10 -8
-8
-10
7
Game Theory and StrategyThe Prisoners’ Dilemma Game can occur in many contexts:
What is best for an individual may not be best for a division;
What is best for a division may not be best for a firm;
What is best for a firm many not be best for an industry;
What is best for an industry may not be best for a nation; and
What is best for a nation may not be best for the world. 8
Game Theory and Strategy
Now that we have learned the concept of dominant strategy equilibrium, there is a second important equilibrium concept called a Nash equilibrium.
Note: All dominant strategy equilibrium are Nash equilibrium, but not all Nash equilibrium are dominant strategy equilibrium.
Game Theory and Strategy
Game with no dominant strategy equilibrium, but a Game with one Nash equilibrium:
Row
Coop
erat
eFi
nk Cooperate Fink
Column
5
4 1
9
-1 0
0
4
Game Theory and Strategy
A cooperative game with conflictGame with multiple (two) Nash equilibria
Man Pr
ize
Figh
tBa
llet
Prize Fight Ballet Woman
2
-1 1
-5
-5 2
1
-1
Game Theory and Strategy
Suppose this game were played sequentially?Would it be better to go first or second?
Man Pr
ize
Figh
tBa
llet
Prize Fight Ballet Woman
2
-1 1
-5
-5 2
1
-1
Game Theory and Strategy
Would you want to move first or second?
Man Pr
ize
Figh
tBa
llet
Prize Fight Ballet Woman
10
100 20
4
90 30
8
6
Game Theory and Strategy
Initial Game (played simultaneously)
Airb
usN
o La
unch
Lau n
ch
No Launch Launch Boeing
400
400300
300
200 -100
-200
200
How Can “Commitment” Affect A Competitor’s Response?
Commitment = An Irreversible Action (Sunk Costs)Competition In The Commercial Aircraft Industry
Airb
usN
o La
unch
Lau n
ch
No Launch Launch Boeing
400
400300
300
200 -100
-200
200
Game Theory and Strategy:
Lessons #1
1. Commitment (sunk costs) can be used to achieve competitive advantage.
• Preemption strategy
• Note: It is important to communicate the commitment to competitors.
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Game Theory and Strategy
Joint Venture
GM Coop
erat
eL.
Rac
e
Cooperate L. Race Toyota
112
123112
123
58 91
91
58
How Can “Commitment” Affect A Competitor’s Response?
Commitment = An Irreversible Action (Sunk Costs)
GM Co
oper
ate
L. R
ace
Cooperate L. Race Toyota
112
123112
-28
58 91
-51
58
How Can “Commitment” Affect A Competitor’s Response?
Mutual sunk cost commitments
GM Co
oper
ate
L. R
ace
Cooperate L. Race Toyota
112
-28112
-28
58 -51
-51
58
Game Theory and StrategyLessons #2:
2. Commitment (sunk costs) can be used to achieve cooperation.
The importance of mutual economic hostages: The wise manager should think beyond Machiavelli’s myopic approach to contracting and should seek both to give and receive credible (sunk cost) commitments that facilitate ongoing relationships and adaptation.
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