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slides_class6 - Managerial Economics Class 6 1. 2. 3. 4. 5....

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Managerial Economics – Class 6 1. Introduction to Game Theory 2. Normal from games 3. Nash equilibrium 4. Application to advertising campaings 5. Cooperative games 6. Sequential move games 7. Oligopoly and strategic interaction 1
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Game Theory Games in economics are simple mathematical models with a whole bunch of assumptions. What defines an economic game? Players Strategies (decisions or actions) Payoffs Rules (who moves first, when, how often, what do the players know and when do they know it, etc.) Basic game types: One-shot vs. repeated Simultaneous move vs. sequential Perfect information vs. imperfect 2
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Example of a “Normal Form” Game Strategy A B C a b c Angelina Brad 12 , 11 11 , 12 14 , 13 11 , 10 10 , 11 12 , 12 10 , 15 10 , 13 13 , 14 3
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Normal Form Game: Analysis Suppose Brad thinks Angelina will choose “A”. Strategy A B C a b c Angelina Brad 12 , 11 11 , 12 14 , 13 11 , 10 10 , 11 12 , 12 10 , 15 10 , 13 13 , 14 4
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Normal Form Game: Analysis Then Brad should choose “a”. Brad’s best response to “A” is “a”. Strategy A B C a b c Angelina Brad 12 , 11 11 , 12 14 , 13 11 , 10 10 , 11 12 , 12 10 , 15 10 , 13 13 , 14 5
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Normal Form Game: Analysis Suppose Brad thinks Angelina will choose “B”. Strategy A B C a b c Angelina Brad 12 , 11 11 , 12 14 , 13 11 , 10 10 , 11 12 , 12 10 , 15 10 , 13 13 , 14 6
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Normal Form Game: Analysis Then Brad should choose “a”. Brad’s best response to “B” is “a”. Strategy A B C a b c Angelina Brad 12 , 11 11 , 12 14 , 13 11 , 10 10 , 11 12 , 12 10 , 15 10 , 13 13 , 14 7
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Normal Form Game: Analysis Similarly, if Brad thinks Angelina will choose C… Brad’s best response to “C” is “a”. Strategy A B C a b c Angelina Brad 12 , 11 11 , 12 14 , 13 11 , 10 10 , 11 12 , 12 10 , 15 10 , 13 13 , 14 8
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Dominant Strategy Regardless of whether Angelina chooses A, B, or C, Brad is better off choosing “a” “a” is Brad’s Dominant Strategy Strategy A B C a b c Angelina Brad 12 , 11 11 , 12 14 , 13 11 , 10 10 , 11 12 , 12 10 , 15 10 , 13 13 , 14 9
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Put Yourself in your Rival’s Shoes What should Angelina do? Angelina has no dominant strategy But Angelina should reason that Brad will play “a”. Therefore Angelina should choose “C”. Strategy A B C a b c Angelina Brad 12 , 11 11 , 12 14 , 13 11 , 10 10 , 11 12 , 12 10 , 15 10 , 13 13 , 14 10
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Nash Equilibrium This outcome is called a Nash equilibrium : “a” is player Brad’s best response to “C”. “C” is player Angelina’s best response to “a”. Strategy A B C a b c Angelina Brad 12 , 11 11 , 12 14 , 13 11 , 10 10 , 11 12 , 12 10 , 15 10 , 13 13 , 14 11
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Advertising Wars: The Players Anheuser-Busch : Quick facts Anheuser-Busch (now part of InBev) 2007 Total Sales = $15.71 billion 2007 Gross Profit = $1.97 billion 2007 Ad Expenditures = $379 million SABMiller : Quick facts This is a British company 2007 Total Sales = $17.06 billion 2007 Gross Profit = $2.02 billion 2007 Ad Expenditures = $182 million Sources: http://money.cnn.com/magazines/fortune/global500/2007/snapshots/ http://www.highbeam.com/doc/1G1-177671794.html 12
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Ad Campaigns Frequently these companies launch massive advertising campaigns with the goal of attracting market share (and profits) away from rivals.
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This note was uploaded on 04/30/2011 for the course MBA 862 taught by Professor Phi during the Fall '11 term at Clemson.

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slides_class6 - Managerial Economics Class 6 1. 2. 3. 4. 5....

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