Chapter13

Chapter13 - MANAGERIAL ECONOMICS An Analysis of Business...

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1 MANAGERIAL ECONOMICS An Analysis of Business Issues Howard Davies and Pun-Lee Lam Published by FT Prentice Hall
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2 Chapter 13: Game Theory and Its Application in Managerial Economics
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3 Objectives On completion of this chapter you should: understand the place of game theory in Economics be able to represent and solve simple games apply game theory to the issue of collusion model Cournot, Bertrand and von Stackelberg competition be able to take a game-theoretic approach to entry deterrence appreciate the limits of game theory
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4 A ‘Paradigm Shift’ Bringing Industrial Economics and Managerial Economics Together The ‘old’ Industrial Economics used the Structure-Conduct-Performance paradigm dependent variable is the performance/ profitability of a sector performance determined by structure; with high entry barriers, high concentration and high product differentiation profits will be high cross- sector multiple regressions the dominant empirical technique behaviour of individual firms (conduct) largely implicit
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5 A ‘Paradigm Shift’ Bringing Industrial Economics and Managerial Economics Together Industrial Organization now dominated by game theory focus is on what happens within an oligopolistic industry, not on differences across industries decisions taken by individual firms have become the centrepiece of analysis case studies of firms’ conduct have become the dominant empirical method
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6 Basic Concepts in Game Theory Warning! Game theory is difficult and can involve highly complex chains of reasoning A game is any situation involving interdependence amongst ‘players’ Many different types of game: co-operative versus non-co-operative (which is the main focus) zero-sum, non-zero-sum simultaneous or sequential one-off versus repeated repeated a known number of times, infinite number of times or an unknown but finite number of times continuous versus discrete pay-offs complete versus asymmetric information Prisoners’ Dilemma, assurance games, chicken games, evolutionary games
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7 Representing and Solving Games A Simultaneous Game in Strategic Form: The Payoff Matrix Company A’s Actions High Price Low Price High Price 100 A ,100 B 120 A , -20 B Company B’s Actions Low Price -20 A ,120 B 50 A ,50 B
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8 Representing and Solving Games The same game in sequential form Company B Company A Company A High Price Low Price 100 A , 100 B 120 A , -20 B -20 A , 120 B 50 A , 50 B High Price Low Price High Price Low Price
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9 Representing and Solving Games Use rollback or backward induction to solve sequential games if Company B has set a high price then A chooses a low price: the ‘B high/A high’ branch can be pruned if B set a low price then A will choose a low price: the ‘B low/ A high’ branch can be pruned
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This note was uploaded on 08/07/2011 for the course PMBA 2963.2 taught by Professor Stephenchiu during the Spring '03 term at HKU.

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Chapter13 - MANAGERIAL ECONOMICS An Analysis of Business...

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