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lecture8 - Game Theory Mike Shor Lecture 8"The power to...

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Game Theory “The power to constrain an adversary depends upon the power to bind oneself.” - Thomas Schelling Mike Shor Lecture    8
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Review Credible commitments require Severe enough punishment to change behavior Irreversible and clear actions Today: Changing the game for strategic advantage Overcoming the prisoner’s dilemma Mike Shor Game Theory & Business Strategy 2
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Moving Beyond                                the Prisoner’s Dilemma Why does the dilemma occur? Interaction No fear of punishment Short term or myopic play Firms: Lack of monopoly power Homogeneity in products and costs Overcapacity Incentives for profit or market share Consumers Price sensitive Price aware Low switching costs Mike Shor Game Theory & Business Strategy 3 Today
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Altering Firm Behavior Firms: Lack of monopoly power Be a monopolist Homogeneity in products and costs Differentiate product Lower costs Mike Shor Game Theory & Business Strategy 4 Not-so-useful advice
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Altering Firm Behavior Firms: Overcapacity Reduce capacity Eliminate the urge to lower prices Incentives for profit or market share Cross-shareholding Incentives based on industry profits Mike Shor Game Theory & Business Strategy 5
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The Prisoner’s Dilemma Mike Shor Game Theory & Business Strategy 6 Firm 2 Low High Firm 1 Low 40 , 40 65 , 35 High 35 , 65 60 , 60 Equilibrium:  $40 K Cooperation:  $60 K
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Cross-Shareholding If each firm acquires 20% of the other: Mike Shor Game Theory & Business Strategy 7 Low High 35 , 65
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Cross-Shareholding Mike Shor Game Theory & Business Strategy 8 Low High Firm 1 Low 40 , 40 59 , 41 High 41 , 59 60 , 60 Firm 2 Low High Firm 1 Low 40 , 40 65 , 35 High 35 , 65 60 , 60 Firm 2
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Altering Consumer Incentives Consumers Price sensitive Use customers as hostages Price aware Less price information to customers Increase search costs Low switching costs Increase lock-in Mike Shor Game Theory & Business Strategy 9
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Hostages Promises can sometimes
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