• Making decisions in situations of strategic interdependence • What is strategic interdependence? • Your payoffs (profits) depend not only on your actions but also the actions of others (competitors)
How to Play the Competition Game: The Guessing Game • Guess a number between 0 and 100 • The guess closest to 2/3 of the average number wins £1 • Ties will be broken randomly • Please enter your name and guess via link provided
The Guessing Game and the Stock Market (optional reference: Camerer, Ho & Chong 2004 Quarterly Journal of Econ. ) “It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” – John Maynard Keynes (1883-1946) The General Theory of Employment, Interest and Money , 1936
Staying (Just) One-Step Ahead of Your Competitors
Judo Economics/Strategy (Yoffie & Kwak 2002 in Major Readings) • Why might it be a good idea to destroy some of your machines in order to compete against a big rival? • An example of credible commitment • What might a retail manufacturer do when a big competitor unleashes a cash coupon campaign?
Silent Confess Silent Confess -1, -1 -20, 0 -10, -10 0, -20 Prisoner 2 Prisoner 1 Two Major Examples of Competition Games: (1) Prisoners’ Dilemma
Marketing Example: Pricing Decision 300, 300 100, 400 200, 200 400, 100 PEPSI COKE High Low High Low
100, 100 170, 75 115, 115 75, 170 Marketing Example: Advertising Decision (and a way out?) PEPSI COKE High Low High Low
A Milder Form of Prisoners’ Dilemma: Quantity Competition • Judo economics example is one • The OPEC story is another K
Buzz Jim Dare Swerve Dare Swerve -5,-5 10, 0 0, 0 0, 10 Two Major Examples of Competition Games: (2) Game of Chicken
-100, -100 5, 75 0, 0 75, 5 Marketing Example: New Product Introduction PHILIPS SONY Now Later Now Later
A Potentially Vicious Scenario: Brinkmanship (the Game of Silence) 1. Two players, say X and Y 2. Countdown over 1 min 3.
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