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slides_class7 - Managerial Economics Class 7 1. More on...

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Unformatted text preview: Managerial Economics Class 7 1. More on sequential games 2. Mixed strategies 1 Airbus vs. Boeing In early 1990s, Airbus lacked a jumbo jet The problem is the monopoly of the 747 They have a product. We have none. - Airbus Executive Initiated plans to build super-jumbo jet with seating for over 600 passengers Industry feasibility studies Room for at most one mega-seater in market Boeing issues a threat Boeing, the worlds top aircraft maker, announced it was building a plane with 600 to 800 seats, the biggest and most expensive airliner ever. - BusinessWeek, 1993 2 How does the game unfold? 3 Airbus-Boeing Sequential-Move Game Airbus Boeing $4 billion , $4 billion $0.3 billion , $3 billion o u t i n o u t i n $1 billion , $1 billion $0 , $0 o u t i n Forward-looking perspective Airbus makes the first move: Must consider how Boeing will respond If Airbus stays out: Conclusion: Boeing stays out too 4 Boeing $0 billion $1 billion o u t i n Forward-looking perspective Airbus makes the first move: Must consider how Boeing will respond If Airbus enters: Conclusion: Boeing again stays out 5 Boeing $3 billion $4 billion o u t i n Apply backward reasoning Consider the first move: Only ( In , Out ) is sequentially rational In is not credible for Boeing 6 Airbus Boeing $0 , $0 o u t i n out $0.3 billion , $3 billion out Aircraft maker Boeing Co. is dropping plans for a larger version of the 747 jumbo jet, conceding that segment of the market to competitor Airbus - CNN, 2001 Takeaway: Threats must be credible to affect rivals behavior. Non-credible threats will not succeed 7 Challenge of sequential games Thinking backwards is easy in theory Start at the end of the tree and trim away (eliminate dominated strategies) Thinking backwards is challenging in practice Keys to success Look forward and reason backwards Anticipate what your rivals will do tomorrow in response to your actions today 8 Example: A voting game Gore v. Bush, U.S. Supreme Court Court has nine members Split along ideological and philosophical lines Three possible dispositions of case Declare Bush the winner Declare Gore the winner Remand case to Florida Supreme Court with guidance for further consideration 9 Example: A voting game Voting takes place in two rounds Remove lowest vote getter after round one Member preferences 4 ( B > G > R ) 3 ( G > R > B ) 2 ( R > B > G ) Results of head-to-head match-ups B beats G ; G beats R ; R beats B Voting results (example) 10 The sequential game 11 R vs. G B vs. R B vs. G R G B B R G B R G B Forward-looking perspective 12 A majority prefers R to B A majority prefers B to G B vs. R B vs. G B B R G B R G B Apply backward reasoning...
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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_class7 - Managerial Economics Class 7 1. More on...

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