Chapter 13A
Additional Game Theory Applications
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A One-Time Game: Strategy and
Equilibrium
• A one-time game
• A simultaneous game
• A positive-sum game
• Zero-sum game
• Negative-sum game
• A firm’s dominant strategy
LO10
13A-2
A One-Time Game: Strategies and
Equilibrium
• Nash equilibrium
• Outcome from which neither firm wants to
deviate
• Current strategy viewed as optimal
• Stable and persistent outcome
LO10
13A-3
A One-Time Game
Dramco’s price strategy
LO10
International
A
National
International
Chipco’s price strategy
•2 competitors
•2 price strategies
•Each strategy has a
payoff matrix
•Independent
actions stimulate a
response
C
$11
National
B
$11
$5
$5
$20
$20
D
$17
$17
13A-4
Credible and Empty Threats
• Credible threats
• Threat that is believable by the other firm
• Can establish collusive agreements
• A strong enforcer can prevent cheating
• Can generate higher profits
• May be countered with threat by rival
• Empty threats
• A threat that is not believable by rival
LO10
13A-5
Repeated Games
•
•
•
•
LO10
Repeated game is a game that recurs
May cooperate and not compete strongly
Rival reciprocates
Examples
• Pepsi and Coke
• Boeing and Airbus
• Walmart and Target
• Nike and Adidas
13A-6
Repeated Games
ThirstQ’s advertising strategy
LO10
$10
$8
$8
$16
$16
D
$12
$12
Promo budget
B
Promo budget
A
Normal budget
C
$10
Normal budget
2Cool’s advertising strategy
Promo budget
A
Normal budget
2Cool’s advertising strategy
Promo budget
ThirstQ’s advertising strategy
C
$11
Normal budget
B
$11
$10
$10
$14
$15
D
$13
$13
13A-7
First-Mover Advantages
• Sequential game
• Firms apply strategies sequentially
• Final outcome depends on who moved first
• Rival must respond
• First-mover advantage
• Advantages for the firm that is first
• May be better prepared
• May preempt entry of rival
LO10
13A-8
First-Mover Advantages
Big Box strategies
Build
LO10
Build
Don’t build
Huge Box strategies
A
Don’t build
-$5
B
-$5
C
$0
$0
$12
$12
D
$0
$0
13A-9