Ch13 - Chapter13 Strategy 1 GameTheory .Inthesimplestgames...

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1 Chapter 13 Game Theory and Competitive  Strategy
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2 Game Theory Games   – about strategic decisions  Players  – the participants Payoffs  – outcomes (i.e. benefits) Strategy  – a rule or plan of action Game theory tries to determine the optimal  strategy for each player. In the simplest games  are the ones where the player’s have a  dominant  strategy  (i.e. one that is optimal no matter what  an opponent does)
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3 Prisoners’ Dilemma Prisoner A Confess Don’t Confess Confess Don’t Confess Prisoner B -5, -5 -1, -10 -2, -2 -10, -1 Confessing is the   dominant strategy for  each player no matter what B does,  A is better off  confessing no matter what A does,  B is better off  confessing Here, there is an  equilibrium in dominant  strategies: “ Confess- Confess
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4 Advertising Game Here, firms A and B  are in a Prisoners’  Dilemma Equilibrium in  dominant strategy Note this is not the best  possible outcome! Firm A Advertise Don’t Advertise Advertise Don’t Advertise Firm B 10, 5 15, 0 10, 2 6, 8
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5 10, 5 15, 0 20, 2 6, 8 Firm A Advertise Don’t Advertise Advertise Don’t Advertise Firm B Modified Advertising Game Here, firm A’s optimal  decision depends on what  the other player does; that  is, A doesn’t have  dominant strategy B: Dominant strategy is  to advertise So firm A can  determine B’s  dominant strategy
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