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Lecture 6 Game Plan
Strategic moves continued
… how to be credible
Dynamic Pricing Game
Strategic substitutes and complements
commitments to be tough vs. soft
puppy dog ploy, lean & hungry look, etc.
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Dynamic Pricing Game-Game Theory For Managers-Lecture Slides, Slides of Game Theory
Content of Game Theory for Managers course includes ratiinality, prisoner dilemma, Loyal servant, assurance, credibility, stratigic subtitutes, entry, brinkmanship, negotiation, auctions, signaling, reputation etc. This file contains: Dynamic, Pricing, Game, Trucking, Entry, Company, Million, Market, Served, Products
Typology: Slides
2011/2012
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Lecture 6 Game Plan^ ^ Strategic moves continued^ ^ … how to be credible^ ^ Dynamic Pricing Game^ ^ Strategic substitutes and complements^ ^ commitments to be tough vs. soft^ ^ puppy dog ploy, lean & hungry look, etc.
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Trucking Entry (from Chevalier reading)^ ^ A new trucking company is consideringentering two
natural monopoly
markets for hauling agricultural products 1. Market 1 currently served by railroadwith MC = $.20/ton-mile and track thatcost $20 million 2. Market 2 currently served by truckingcompany with MC = $.20/ton-mile andtrucks that cost $20 million
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Conventional Wisdom ^ Don’t burn bridges. ^ Decrease downside risk. ^ It is nice to have more options. ^ This ignores the strategic value ofcommitment!
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Credibility^ ^ Remove strategies^ ^ from your own set of future choices thestrategies that may tempt you in the future^ ^ Example: giving away your patent^ ^ Reduce payoffs^ ^ from those strategies that may tempt you^ ^ Example: customers as hostages.^ Slide courtesy of Mike Shor, Vanderbilt University.
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Removing Strategies II ^ Burning Bridges^ ^ Power comes from
not^ being able to retreat
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Burning Bridges “A surrounded enemy mustbe given a way out” - Sun Tzu in “Art of War”, 400BC
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Burning Bridges: Example 2 Polaroid instant photography^ ^ Refused to diversify out of its core business.With all its chips in instant photography, it wascommitted to fight against any intruder in themarket.^ ^ On April 20, 1976, after twenty-eight years ofa Polaroid monopoly on the instantphotography market, Eastman Kodak enteredthe fray.
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Burning Bridges: Example 2^ ^ 12 October 1990: Court awards Polaroid a $900million judgment against Kodak. Kodak forced towithdraw from market
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The Bocchicchio Family^ ^ Mafia in Italy, peaceful in the U.S.^ ^ Mob bosses need to be able to meetsafely, but no one trusts anybody^ ^ Enter the Bocchicchio family^ ^ certain revenge if any Bocchicchio harmed^ ^ act as “hostages” for both sides.^ • if Don Corleone is killed by Don Barzini, then theCorleone family will kill their Bocchiccio^ • But then the Bocchiccio will blame
Barzini^ since he promised the Bocchiccio would be safe!!
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Committing to Fight^ ^ Make yielding market shareintolerable^ ^ adopt high FC, low MC technology^ ^ sign irrevocable agreements forexpensive raw materials^ ^ load up on debt, or covenant debt somanagement loses control of the firm ifmarket share slips
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Island Bars^ ^ Two firms:
Firm 1^ and
Firm 2
^ Two prices: low ($4) or high ($5 ) ^ 3000 captive consumers per firm ^ 4000 floating go to firm with lowest price
Firm 2 Low High 20 , 20 Low
15 , 28 High
Firm 1
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Contracting with Customers^ ^ The game is a prisoner’s dilemma^ ^ Both firms prefer:
{High,High} ^ Only equilibrium:
{Low , Low}
^ Cannot credibly promise to play High ^ Even if committed to High,other firm would still respond with Low How to resolve this? ^ Third-party contracts with customers^ Slide courtesy of Mike Shor, Vanderbilt University.
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