Bargaining - Game Theory continued Repeated Games a better...

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Game Theory, continued Repeated Games a better representation of business strategy than “Single-shot games” First the notion of a future is important in repeated games Infinite vs. finite In games with a future, must consider the current payoff as well as the future payoffs. FOLK THEOREM Any type of behavior can be supported by an equilibrium as long as the players believe there is a high probability of future interaction.
Prisoners’ Dilemma Business Application The Pricing Dilemma (suppose the payoffs are in terms of economic profits) Both would be better off if they could Price High But, that outcome is not an equilibrium Need to find a way to “coordinate” actions Purdue Price low Price High Price Low 0, 0 4,000, -500 SunnyHill Price High -500, 4,000 2,000, 2000
Lessons from Prisoners’ Dilemma Don’t get caught in one (one-shot vs. repeated) Change payoff structure of game so your profits are not dependent on others’ actions Differentiate product Lower costs How to get out of one ( Axelrod’s Tournament ) Be nice: no first strikes (use a “tit for tat” strategy Be forgiving Be easily provoked Don’t be envious Be clear Control competition - LEGALLY! Not Everyone is Opportunistic
Incomplete (asymmetric ) information – certain characteristics are unknown More realistic than assuming all players have complete information. Becomes the basis for cooperative behavior, reputation building. Consider the following entry dilemma where Purdue (entrant) is uncertain about SunnyHill’s (incumbent) response to their entry into a market. Will Sunny Hill be tough and price low or will they accommodate entry and continue to price high?
Purdue Enter Not Enter Price Low (fight) 200, 200 300, 300 “SOFT” SunnyHill Price High (acc) 700, 400 400, 300 Purdue Enter Not Enter Price Low (fight) 600, 200 800, 300 “TOUGH” SunnyHill Price High (acc) 500, 400 200, 300
Building a reputation View a reputation as the history of behavior. Think of a reputation as an asset. Repeated games with more than one Nash Equilibrium lead to coordination Consider the “Battle of the Sexes” game where each player prefers a payoff not preferred by the other. FIRM B Organic Not Organic Organic 0, 0 4,000, 500 FIRM A Not Organic 500, 4,000 0, 0
Assurance games Offering your opponent the assurance of a particular play. Suppose two firms are facing the decision to introduce new standards or to keep old standards.

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