BA 511 Strategic Games
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Transcript of BA 511 Strategic Games
BA 511 Strategic Games
*Some examples are drawn from Thinking Strategically byDixit & Nalebuff
Games in WSJ, Holman Jenkins
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Strategic Games All AroundSituations Bidding-Negotiation;
Auctions Employment: Job Market;
Board-Management; Management-Labor;
Politics/Group Dynamics Pricing, Ad, …
Competition Dating, Marriage Families: Parent-Child,
Spouses, Siblings Games: Poker, Chess,
Risk, …
Behavior Signaling & Filtering Info Altering Perceptions-Beliefs Promises/Threats Changing “Rules” Mixing Actions Incentives for Cooperation Cooperation-Compete
Dilemmas Free-Riding
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• Interdependent Actions & Outcomes • Not Just Playing Against “Market” or “Nature”
Looking Ahead, Reasoning Back Apollo 1
NASA, North American & Congress From the Earth to the Moon, HBO
Business Unit/Office Politics Entry
Products Markets
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Prisoner’s Dilemma2 suspects interrogated/no contactConfess-Don’t Confess 1 Confess: low/high sentences2 Confess: moderate sentencesNo Confess: low/low sentences Hostage’s Dilemma
Business:◦Price Wars ◦Ad Wars◦Entry Wars 5
The Location Games Battle of the Beach
◦ If beachgoers evenly distributed along beach, where to locate hot dog stand?
Business Examples◦ Fast Food/Restaurants◦ Retail◦ TV Reality Shows◦ Politics
Examples: McDonalds & Burger King; Many retail stores; primary & general election races;Harvard-Stanford MBA “Divide the Cities” and focal points
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Location Game with Limited InformationDivide the Cities Game
◦Harvard v. Stanford MBA Students◦Cities Worth Points, Monopoly Worth
Points◦Select “in the dark”
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Bargaining GamesGames of Chicken
◦ Don’t Expect Quick Resolution (12th Hour Agreements)◦ “Crazy” Offers Advantages
“Ultimatum Game” Experiments◦ Split pot if 2 parties agree on split; First makes
offer- Second accepts or declines offer ◦ Variations: size of pot; depreciation of pot;
anonymity; repetition; wealth of participants … Money matters but not all that matters Typical outcomes: bigger than 99:1, less
than 50:50 Patience is a virtue Patience is the best signal of patience
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“Strategic Moves”: Game Changers
Credible Threats/Promises/Commitments◦ Cortez Burning His Ships◦ Large Sunk Costs (e.g. ads)
Change Size/Order of Payoffs/Choices◦ “Salami Tactics”◦ Crimea, My Daughter◦ Retailers agents as response◦ Agenda Control, Voting Rules
Change Beliefs◦ Bargaining
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First Mover Advantage?Last Better if info
from observing◦ Sailing◦ NCAA Overtime◦ Innovation
First Better if change beliefs/incentives-payoffs or loyalty◦ Innovation◦ Poker
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Don’t Outsmart Yourself Dixit & Nalebuff: Jerusalem
TaxiJerusalem Taxi Ride
Colts v. Saints 2010 Super Bowl olts-Saints Super Bowl
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Essentials of Strategic Games
Who are Key Decision makers (units)?
What is the Timing of Decisions?
What Information is Available?
What Actions are Possible?
Payoffs to decisions?
Manipulation Possibilities?
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Insight on Solutions “Nash Equilibrium”
Choosing the best when opponent choosing best
◦Sequential Games “Rollback”: Look ahead to last period and
work back◦Simultaneous Games
Iterative: step-by-step analysis of best choice given a decision by other
◦Repeated-Simultaneous Games Rollback + Iterative 13
“Nash”Iterative Solutions to Simultaneous Game (PD Example)
• Payoffs = (Coke profits , Pepsi profits)• Decisions: Price Low or Price High
Pepsi DecisionLow High
CokeDecision
Low 10,10 1,20High 20,1 3,3
Example Solution to a Simultaneous Game
• First Iteration: Coke considers best choice if Pepsi sets low price (column 1)
Pepsi Low
Coke Low 10,10 High 20,1
Best choice for Coke, if Pepsi Sets Low Price
Solutions to Simultaneous• Second Iteration: Coke considers best choice if Pepsi sets high
price;• Low is dominant strategy for Coke; Low better than high in
both iterations
PepsiHigh
CokeLow 1,20High 3,3
Best outcome for Coke, If Pepsi Sets High Price
Solving Sequential Games“Life must be understood backward, but … it must
be lived forward.” - Soren Kierkegaard
Diagram a game tree – simplify if needed
Start with the last move in the gameDetermine the best course(s) of action
for the player with the last move Trim the tree -- Eliminate the
dominated strategiesRepeat the procedure at the prior
decision node(s) with the trimmed tree17
An Example: Market Entry
Game Essentials:◦Players: Current firm (F) with large
market share faces a potential entrant (E)
◦Timing: Potential entrant moves first◦Moves: Potential entrant (enter-stay
out) Current firm (accept passively-fight)
◦Information: full information◦Payoffs: (see game tree)◦Rules: Fixed (to simplify game for
now)18
Market Entry in Game Tree
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E out
in F fight
acc
(0, 100)
(-10,-20)
(20,75)
Payoffs = (E, F) expressed as profits (mil $)
Looking Forward…Entrant makes the first move:
Must consider how F will respondIf enter:
Current Firm better off if accepts; so trim “fight” branch from tree
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F fight
acc
(-10,-20)
(20,75)
… And Reasoning BackNow consider entrant’s move with tree
trimmed
Solution = (In, Accept Passively )
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E out
in F
(0, 100)
(20,75)acc