DA7-multiperiod-handout

DA7-multiperiod-handout - Multi-Period Games Game Trees...

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1 1 Game Trees UGBA 143: Game Theory and Business Decisions 2 Multi-Period Games Can be represented using a “game tree” (also called extensive-form game) Each node represents a decision maker Each branch represents a possible alternative Each end of the tree (“leaf”) summarizes every party’s payoffs from following that specific path through the tree Logic: backward induction Similar to “rollback” concept in decision trees 3 Market Entry A monopolist is facing potential market entrant “If you enter, I will fight you aggressively.” Price war will crush entry attempts, but will also decrease market value from $10m to $7m Post entry market will be divided 80:20 in favor of the incumbent How do both parties view this situation? 4 Market Entry What if… After entering the market, Entrant may further expand capacity, leading to a 50:50 division of the total market value? How would you represent this situation in a game tree? What would the outcome be?
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DA7-multiperiod-handout - Multi-Period Games Game Trees...

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