Strat.Multistage Games.student

Strat.Multistage Games.student - Strategy: Multistage Games...

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Strategy: Multistage Games
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Key issues 1. preventing entry: simultaneous decisions 2. preventing entry: sequential decisions 3. creating and using cost advantages 4. advertising
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Preventing entry consider a market with either 1 or 2 firms simultaneous entry decision: neither firm has an advantage that helps it prevent other firm from entering sequential decision: incumbent may have an advantage over firm deciding whether to enter
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Simultaneous decisions initially no gas stations physical space for at most 2 gas stations 2 firms consider opening a gas station at a highway rest stop
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Room for 2 firms firms have pure (dominant) strategies: both enter unique, pure strategy equilibrium Room for only one firm game is similar to game of chicken neither firm has a dominant strategy Simultaneous Decisions
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Problem with pure strategies game has two Nash equilibria in pure strategies: Firm 1 enters and Firm 2 does not Firm 2 enters and Firm 1 does not players don’t know which Nash equilibrium will result could collude: firm that enters could pay other firm to stay out of market these pure Nash equilibria are unappealing because identical firms use different strategies
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Mixed strategies mixed strategies : firm chooses between its possible actions with given probabilities firms may use same strategies if their strategies are mixed in our game, each firm enters with 50% probability result: Nash equilibrium in mixed strategies
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Mixed strategy equilibria
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Firm 2’s response if Firm 1 uses this mixed strategy, Firm 2 cannot do better using a pure strategy if Firm 2 enters with certainty, it earns $1 half of the time time loses $1 other half so its expected profit is $0 if Firm 2 stays out with certainty, Firm 2 earns $0
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Nash equilibria firms play mixed strategy one firm plays pure strategy of entering and other firm plays pure strategy of not entering
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This note was uploaded on 08/01/2008 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Strat.Multistage Games.student - Strategy: Multistage Games...

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