Week 10 A

Week 10 A - COMM/FRE 295 November 9 2010 Business Strategy...

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COMM/FRE 295 November 9, 2010 Business Strategy
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Strategic Move A strategic move provides a firm with a specific advantage in a game A strategic move often involves constraining ones choices and letting your opponent know that you have no option but to choose the strategy you most desire (i.e., a costly-to-reverse commitment is made) For example, in the breakfast cereal game, who gets to move first and obtain the first mover advantage?
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Threats and Commitments A strategic move to gain a strategic advantage in a game (e.g., achieve first-mover advantage) generally requires a credible threat If firm 1 announces it will move first and thus produce a sweet cereal, firm 2 must believe firm 1 has no other choice or else it will also announce that it will move first and produce the sweet cereal How can firm 1 make its announcement credible? expensive pre-launch advertising campaign Pre-purchase inputs (e.g., sugar) or install specialized machinery
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Strategic Car/Engine Example Firm E sells engines mostly to Firm C, which manufactures cars The type of engine that E produces will depend on the type of car produced by C, so C is the leader and E is the follower E will choose Small if C chooses Small and will choose Big if C chooses Big . C will choose Small because 6 > 3 , but E prefers the Big, Big outcome because 8 > 3 This is the equilibrium
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Car/Engine Example, Cont’n Suppose E destroys production capacity or takes another action such that the new game looks like Now E will choose Big no matter what C does. Therefore, C will choose Big because 3 > 1. The strategic move shifted the equilibrium to Big Big Equilibrium
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Summary In many games we end up with two Nash equilibrium: player A prefers one and player B the other Firms may take actions before the game to change the payoff matrix to their advantage Specifically, a player would like to credibly commit
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Week 10 A - COMM/FRE 295 November 9 2010 Business Strategy...

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