Deck 14: Game Theory and Competitive Strategy

Question 1

Trigger strategies can be used to:

A) solve the end of game problem.
B) resolve the lack of a Nash equilibrium in one-shot games.
C) ensure that the costs of breaking agreements exceed any resulting benefits.
D) solve finitely repeated game with a certain final period.

Answer 1

C

Question 2

In a game:

A) there can be no more than two players.
B) agents strive to maximize their expected utility
C) payoffs are wholly determined by each player's own course of action
D) decision makers must take into account the reasoning of each other.

Answer 2

D

Question 3

Nash equilibrium:

A) occurs when each player pursues a dominant strategy.
B) occurs when each player pursues a secure strategy.
C) is precluded when players pursue randomized strategies.
D) is not possible in simultaneous-move, one-shot games.

Answer 3

A

Question 4

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

A) one-shot game with a dominant strategy.
B) one-shot game with no dominant strategy.
C) repeated game with no dominant strategy.
D) repeated game with a dominant strategy.

Question 5

Because any profit recorded by the buyer of an option is exactly matched by the seller's loss, options can be described as a:

A) cooperative game.
B) positive-sum game.
C) negative-sum game.
D) zero-sum game.

Question 6

When Gillette invests millions of dollars to establish high-quality brand-name recognition with repeat customers, it is involved in a:

A) one-shot game.
B) repeated game of finite duration.
C) repeated game of infinite duration.
D) simultaneous-move game.

Question 7

Nash bargaining is a:

A) one-shot game.
B) simultaneous-move game of only limited duration.
C) simultaneous-move game of only unlimited duration.
D) simultaneous-move game of limited or unlimited duration.

Question 8

Monopoly profits reflect:

A) competitive advantage.
B) comparative advantage.
C) strategic advantage.
D) none of these.

Question 9

In any strategic game:

A) different strategies result in different payoffs.
B) each player is aware of all prior moves.
C) the allocation of positive payoffs is an equilibrium outcome.
D) multiple equilibrium outcomes are stable.

Question 10

In the Prisoner's Dilemma game:

A) complete solution is derived using the look ahead and extrapolate back principle.
B) each player moves in succession.
C) each player is aware of all prior moves.
D) none of these.

Question 11

Maintaining cartel-like agreements is made easier in the:

A) absence of a Nash equilibrium.
B) presence of a Nash equilibrium.
C) presence of a secure strategy.
D) absence of a secure strategy.

Question 12

Solving complex sequential games that involve millions of calculations:

A) requires a finite sequence of moves.
B) is impossible.
C) does not depend upon the look ahead and extrapolate back principle.
D) none of these.

Question 13

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

A) one-shot game with no secure strategy.
B) one-shot game with a secure strategy.
C) repeated game with no secure strategy.
D) repeated game with a secure strategy.

Question 14

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

A) cooperative game.
B) positive-sum game.
C) zero-sum game.
D) nonstrategic game.

Question 15

The general principle for players in a sequential game is to:

A) look ahead and extrapolate back.
B) trigger a sequence of irrational responses from competitors
C) trigger a sequence of rational decisions from competitors.
D) trigger a sequence of rational decisions and responses from competitors.

Question 16

Every one-shot game:

A) has at least one Nash equilibrium.
B) cannot have a Nash equilibrium.
C) can have multiple Nash equilibria.
D) none of these.

Question 17

In a simultaneous-move game, players:

A) do not depend upon the best rational response by other players.
B) make their initial moves without knowledge of moves made by other players.
C) do not depend upon a rational response by other players.
D) anticipate the resulting sequence of moves made by competing players.

Question 18

Sequential games:

A) incorporate the possibility of an irrational response.
B) that end after a finite sequence of moves can be solved completely.
C) involve players that move in succession.
D) involve players that are fully aware of all prior moves.

Question 19

Joint action is favored in:

A) cooperative games.
B) positive-sum games.
C) negative-sum games.
D) zero-sum games.

Question 20

Economic games are set in a:

A) positive economic environment.
B) neutral economic environment.
C) negative economic environment.
D) none of these.

Question 21

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.

Question 22

Game Types. Depict each of the following circumstances as a zero-sum game, a positive-sum game, or a negative-sum game. Explain your answer.
A. United Technologies and competitor 3M Co. engage in brutal price competition for a U.S. Department of Defense contract.
B. The ongoing discussion between American Express and its employees concerning a reduction in travel allowances for business trips.
C. Competitors Merck and Pfizer lobby Congress to increase Medicaid payments for pharmaceutical products.
D. McDonalds Corp. offers free food and prizes to loyal customers.
E. The bargaining that occurs between Wal-Mart and a municipal government concerning payment responsibility for interchange and access road costs made necessary by the location of a new Supercenter.

Question 23

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.

Question 24

With limit pricing:

A) MR = MC
B) P < AR
C) AR = AC
D) none of these.

Question 25

Market penetration pricing is:

A) rarely confused with predatory pricing.
B) used to create a customer lock-in effect.
C) never used to create learning curve advantages.
D) seldom associated with network externalities.

Question 26

In a predatory pricing strategy:

A) P < AC
B) MR = MC
C) P > AVC
D) P < MC

Question 27

Limit Pricing. Microsoft Corp. maintains an Internet web site called MSN Money with an amazing variety of investment news and information that the Company makes freely available to anyone with an Internet connection. MSN Money generates revenue by delivering relevant, cost-effective online advertising to brokers and other financial service providers.

Question 28

Limit pricing is a competitive strategy to set

A) monopoly prices.
B) less than monopoly prices.
C) competitive prices.
D) less than competitive prices.

Question 29

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

A) learning curve advantages.
B) more efficient competitors.
C) monopoly rents.
D) network externalities.

Question 30

Secure Strategies. Imagine two competitors, Microsoft Corp. and Google, Inc., each facing an important strategic decision concerning the pricing of Internet search technology. Microsoft can choose either row in the payoff matrix defined below, whereas Google can choose either column. For Microsoft and Google, the choices are either "market penetration pricing" or "monopoly pricing." 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 Microsoft; the second number is the profit payoff to Google.

Question 31

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.

Question 32

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.

Question 33

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.

Question 34

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.

Question 35

Game Theory Classifications.
Demonstrate whether each of the following statements is true or false.
A. In a zero-sum game, one player's gain is another player's loss.
B. Joint action is favored in all positive-sum games.
C. If a game that holds the potential for mutual gain, it is called a cooperative game.
D. In a sequential game players act at the same point in time and must make their initial moves in isolation without any direct knowledge of moves made by other players.
E. When conflict holds the potential for mutual loss, it is called a negative-sum game.

Question 36

Game Types. Describe each of the following circumstances as a zero-sum game, a positive-sum game, or a negative-sum game. Illuminate your answer.
A. JP Morgan Chase and Citigroup battle over a Federal contract to oversee private accounts for social security investments.
B. Altria Group, maker of Marlboro cigarettes, battles with insurers over the payment of health care costs tied to smoking.
C. The hiring conflict that occurs among departments at Honeywell when an expansion in staff becomes necessary following the award of a big new contract.
D. The discussion between Johnson & Johnson senior management and employees concerning a new MBA tuition cost-sharing benefit.
E. General Electric agrees to sign long-term contracts with suppliers who meet stringent quality guidelines.

Question 37

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).