Dynamics of Strategy

Dynamics of Strategy - Adapted from Baye © 2002 Intro to...

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Unformatted text preview: Adapted from Baye © 2002 Intro to Game Theory: The Competitive Dynamics of Strategy MANEC 387 MANEC 387 Economics of Strategy Economics of Strategy Adapted from Baye © 2002 The Structure of Industries Competitive Rivalry Threat of new Entrants Bargaining Power of Customers Threat of Substitutes Bargaining Power of Suppliers From M. Porter, 1979, “How Competitive Forces Shape Strategy” Adapted from Baye © 2002 Game Theory • (non-cooperative) “Game Theory” is a body of literature that seeks to explain how non-cooperating players (e.g. firms, contestants, etc.) interact • It also tries to predict what outcome non-cooperating players will reach Adapted from Baye © 2002 Fundamentals of Game Theory 1. Identify the players 2. Identify their possible actions 3. Identify their conditional payoffs from their actions 4. Determine the players’ strategies – A strategy is a set of best responses to all possible rival actions 5. Determine the equilibrium outcome(s) – equilibrium exists when all players are playing their best response to all other players Adapted from Baye © 2002 The Nash Equilibrium • The outcome reached when each player is playing his best response to other player’s moves • An outcome from which no player has incentive to deviate Adapted from Baye © 2002 “A Beautiful Mind” • Is the outcome reached by the men in the bar (where each dances with a Brunette) a Nash equilibrium? Adapted from Baye © 2002 Prisoner’s Dilemma Games of Dominant Strategies • Two thieves are caught after their getaway (they hide the loot) • They are being held in separate interrogation rooms • Evidence against them is not strong so the DA needs...
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Dynamics of Strategy - Adapted from Baye © 2002 Intro to...

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