GAME THEORY & COMPETITIVE STRATEGY

Sizing up competitive situations

according to:
1. Number of Competitors
2. The Degree of Conflict or Cooperation
3. The Opportunity for Communication
4. Single or Repeated Competition
5. The Amount of Information
Available

Chapter 10
slide 1

ANALYZING PAYOFF TABLES

First, Translate Competitive Situation into a Payoff
Table.
Second, Analyze Table.
1. Identify Each Sides Best Responses.
2. Eliminate Dominated Strategies (if any).
Does either side have a dominant strategy?
3. In the Absence of Dominant Strategies,
is there a Pair of Equilibrium Strategies?

10.2

10.3

ZERO-SUM GAMES
Market-Share Example
C1

C2

C3

R1 -2 , 2

-1 , 1

4 , -4

R2 3 , -3

2 , -2
-2

5 , -5

R3 7 , 7

-3 , 3

-5 , 5

How does one find

Equilibrium Strategies?

Equilibrium: R2 versus C2
(where circle and square coincide).
Resulting Value is (2, -2).

ZERO-SUM GAMES: SUMMARY

10.4

- There is pure conflict: one sides gain is the others loss.

- There is no possibility of cooperation.
- Equilibrium strategies result in definite value for the game.
- Making the first move is never an advantage and is
often a disadvantage.

10.5

NON-ZERO-SUM GAMES
A Price War
AC=$4

High P=$8
Low P=$6

High P=$8

Price Rivalry (w/ Brand Allegience)

Low P=$6

High P=$8

Low P=$6

10, 10
10
10

5,
88, 12
8

AC=$4

10, 10

(2.5, 2.5)

5, 12
12

High P=$8

(2.5, 2.5)

12,
12 5

77, 77

(6, 1.25)

(3.5, 3.5)

Price competition leads to a

low prices and modest profits.

Low P=$6

12,
8, 85

7, 7

(4, 2)

(3.5, 3.5)

With strong brand allegiance,

price competition is blunted.
Each firms self-interest is to
set a high price.

10.6

CLASSIC NON-ZERO-SUM GAMES

The Prisoner's Dilemma

General

Holdout Double Cross

Hold Out

2, 2

8, 1

Double Cross 11, 8

55, 55

Cooperate

Defect

Cooperate

R, R

S, T
T

Defect

T
T, S

P P
P, P

T > R > P > S

Both prisoners double cross,

Each players dominant strategy
so both serve long, 5-year terms. is to defect (because the temptation
payoff is best and the sucker payoff
is worst.

10.7

QUANTITY COMPETITION
Each Firm's MC is $6.

Industry Price Depends On

Total Output: P = 30 - [Q1 + Q2].
Payoff Table:
Q2 = 6
Q1 = 6
Q1 = 8
Q1 = 10

72, 72

Q2 = 8

60, 80 81 48, 80

64
80, 60
64, 64
64
81
80, 48 49 60, 48

My Best Response to
Competitor's Output?

Q2 = 10
49
48, 60
40, 40

According to table,
Equilibrium is:
Q1 = Q 2 = 8

MARKET ENTRY

10.8

Stay Out

Enter

Stay Out

0, 0

00, 4

Enter

44, 00

-4, -4

Is there a first-mover advantage?

Absolutely. The firm that enters first
preempts the market and deters the
other from ever entering.

10.9

THINKING AHEAD
Fashioning Strategies using Interactive Decision Trees
Example: Deterring Market Entry
E
Keep Price
Enter

5, 10

M
Cut Price

Keep Price
Stay Out

-5, 5
0, 20

Keep
Enter
Not

Cut

5, 10 -5,-5
0,20

0,15

E enters in equilibrium.

M
Cut Price

0, 15

Ms threat to cut price

is not credible.

DETERRING MARKET ENTRY (cont.)

10.10

What if M commits to a pricing strategy

before E can commit to entering?
E
Enter
Keep Price

5, 10

E
Stay Out

Enter
Cut Price

Enter
0, 20
-5, 5

E
Stay Out

Keep

0, 15

Cutting price in advance deters entry!

Not

Cut

5, 10 -5,-5
0,20

0,15

BATTLE FOR AIR PASSENGERS

Market = $900k (3,600 x $250)
Each flight: $25k & 300 seats
Therefore, A = 900[A/(A+B+C)] 25A
Airlines will make first-period decisions
and see the profit results.
Then, they will play for second and then
third periods.
Benchmarks:
Collusion
Perfect Competition
Equilibium

4 each, = 200 each

12 each, = 0 each
8 each, = 100 each

10.11