lecture7 - Game Theory Mike Shor Lecture 7"The difference...

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Game Theory “The difference between genius and stupidity is that genius has its limits.” - Albert Einstein Mike Shor Lecture    7
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Punishment and Credibility Review Cooperation requires sacrificing immediate profits for a future relationship The sacrifice is only made if the punishment is severe enough Punishment that is too severe is not credible Outline: What is credibility? Payoffs, strategies, irrationality A credibility check list Mike Shor Game Theory & Business Strategy 2
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The Winning Lottery Ticket “It won’t change me one bit!” Mike Shor Game Theory & Business Strategy 3
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What is Credibility? “The difference between genius and stupidity is that genius has its limits.” – Albert Einstein Telling you I’m going to act in my best interest is not committing To commit to a suboptimal action, I need to: Change the game Change perceptions Mike Shor Game Theory & Business Strategy 4
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How to be Credible? Reduce payoffs from those strategies that may tempt you Make it costly to renege Remove strategies from among those that may tempt you in the future Destroy avenues of retreat Become irrational by eliminating strategic control Remove “human meddling” Mike Shor Game Theory & Business Strategy 5
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Talk is Cheap “ Continental Airlines said yesterday that it would raise airfares on about two-thirds of its routes … to take effect September 5.” - The New York Times August 29, 1992 Mike Shor Game Theory & Business Strategy 6
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Commitment Must commit to be credible! “The difference between ‘involvement’ and ‘commitment’ is like an eggs-and-ham breakfast: the chicken was ‘involved’ – the pig was ‘committed.’ ” Mike Shor Game Theory & Business Strategy 7
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Commitment vs. Involvement Two firms considering market entry: Market potential is $10 million NPV profits Entry costs $7 million
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lecture7 - Game Theory Mike Shor Lecture 7"The difference...

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