Exam 14: Game Theory and Competitive Strategy

Nash bargaining is a:

Trigger strategies can be used to:

Prisoner's Dilemma. In the classic characterization of the prisoner's dilemma, two hypothetical suspects, Ken Lay and Andy Fastnow, are arrested by the FBI. Assume the FBI has insufficient evidence for a conviction, and having separated both prisoners, visit each of them and offer the same deal: if one agrees to confess and implicates the other, while the other remains silent, the silent accomplice receives the full 10-year sentence and the confessor gets 1 year. If both stay silent, the FBI can only gain a conviction on a lesser charge for which both prisoners will get 2 years in prison. If both confess, they will each receive a 5-year sentence. Each prisoner has two options: to remain quiet and not implicate the accomplice, or to betray the accomplice and confess. The outcome of each choice depends on the choice of the accomplice. However, neither prisoner knows the choice of the accomplice. Assume both prisoners are completely selfish and their only goal is to minimize their own jail terms.

When Coca-Cola and Pepsi vie to become exclusive suppliers of soft drinks at the next Olympics, they are competing in a:

Monopoly profits reflect:

Economic games are set in a:

Limit pricing is a competitive strategy to set

Game Types. Portray each of the following circumstances as a zero-sum game, a positive-sum game, or a negative-sum game. Illustrate your answer. A. The ongoing discussion between Home Depot and its employees concerning an increase in the payment deductible for health benefits. B. The bargaining that occurs between a Kraft Foods and the local water utility concerning payment responsibility for an increase in water and sewer costs tied to a business expansion. C. GM and the UAW join forces to lobby Congress for increased national health insurance expenditures. D. Procter & Gamble issues price discount coupons for heavy users of Tide detergent. E. Intel Corp. and competitor Advanced Micro Devices, Inc., engage in brutal price competition for a State Department contract.

The success of market penetration pricing strategies does not depend on the eventual emergence of:

Sequential games:

End-of-game problem. In mid-2005, former WorldCom Inc. Chief Executive Bernard Ebbers asked a federal judge for a lighter sentence than the "draconian life sentence" recommended by the government. Ebbers made the request in a presentencing report that followed his conviction in March of nine counts of fraud, conspiracy and making false filings with regulators. In a brief filed in the U.S. District Court for the Southern District of New York, attorneys for Ebbers, who was then 63 years old, cited his good character, age, poor health and low risk of a repeat offense among the reasons they asked Judge Barbara Jones to give Ebbers a lighter sentence. WorldCom, now known as MCI Inc., was at the center of the biggest accounting fraud in U.S. history and filed for Chapter 11 bankruptcy protection shortly after the $11 billion fraud began to come to light in 2002. It has since reemerged from bankruptcy protection. Five former executives, including former Chief Financial Officer Scott Sullivan, plead guilty to fraud-related charges in connection with the scandal.

Prisoner's Dilemma. In the classic characterization of the prisoner's dilemma, two hypothetical suspects, Bernie Ebbers and Scott Sullivan, are arrested by the FBI. Suppose the FBI has insufficient evidence for a conviction, and having separated both prisoners, visit each of them and offer the same deal: if one agrees to confess and implicates the other, while the other remains silent, the silent accomplice receives the full 5-year sentence and the confessor goes free. If both stay silent, the FBI can only gain a conviction on a lesser charge for which both prisoners will get a fine and serve probation for 6 months in prison. If both confess, they will each receive a 2-year sentence. Each prisoner has two options: to remain quiet and not implicate the accomplice, or to betray the accomplice and confess. The outcome of each choice depends on the choice of the accomplice. However, neither prisoner knows the choice of the accomplice. Assume both prisoners are completely selfish and their only goal is to minimize their own jail terms.

Secure Strategies. Suppose two competitors, McGraw-Hill, Inc., and Pearson, PLC., each face an important strategic decision concerning whether or not they should boost promotion on new product introductions. McGraw-Hill can choose either row in the payoff matrix defined below, whereas Pearson can choose either column. For McGraw-Hill, the choice is either "boost promotion" or "hold promotion constant." For Pearson, the choices are the same. Notice that neither firm can unilaterally choose a given cell in the profit payoff matrix. The ultimate result of this one-shot, simultaneous-move game depends upon the choices made by both competitors. In this payoff matrix, the first number in each cell is the profit payoff to McGraw-Hill; the second number is the profit payoff to Pearson (in billions).

Game Types. Distinguish each of the following circumstances as a zero-sum game, a positive-sum game, or a negative-sum game. Demonstrate your answer. A. Microsoft gives code access to make it easier for suppliers of applications software to write Windows-compatible software. B. IBM and Hewlett-Packard compete to provide the Social Security Administration with a big new services contract. C. ExxonMobil and Du Pont settle a disputed supply contract. D. Competitors SBC Communications and Verizon Communications lobby Congress concerning Internet access charges. E. The Walt Disney Co. and local units of government agree to share environmental costs tied to Walt Disney World operations.

When bidders on a government contract collude to divide markets and eliminate uncertainty, their collusion can be describes as a:

Nash equilibrium:

Game Theory Concepts. Indicate whether each of the following statements is true or false, and explain your answer. A. The theory of games is used to study irrational behavior by individuals and firms in interactive decision problems. B. In a game, only a single player strives to maximize expected utility by choosing particular courses of action. C. Game theory is applied during situations in which decision makers must take into account the reasoning of other decision makers. D. All economic and business games share the common feature of decision payoff independence. E. In competitive games, the outcome for each firm depends upon the strategies conducted by all competitors.