APPLIED GAME THEORY AND STRATEGIC GAME THEORY AND STRATEGIC BEHAVIOR ... Chapter 2 Strategy and Game Theory Concepts Game Theory, ... A GM-Chrysler Merger with

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APPLIED GAMETHEORY ANDSTRATEGICBEHAVIORILHAN KUBILAY GECKILPATRICK L ANDERSONCRC PressTaylor & Francis GroupBoca Raton London New YorkCRC Press is an imprint of theTaylor & Francis Group an Informa businessA CHAPMAN & HALL BOOKFigure ListTable ListPrefacePurpose of this BookOur ApproachOrganization of BookOur AppreciationChapter 1 A Brief History of Game TheoryWhy Study Games? 1Rapid Discoveries in the Twentieth Century 2Key Conceptual Developments in Early Years 2Pioneers of Game Theory and Advancement of the Field 3Game Theory's Evolution during the Last Three Decades 6Recognition 7Chapter 2 Strategy and Game Theory ConceptsGame Theory, Strategy, and Strategic Behavior 10More on Strategic Behavior and Strategy 10Game Theory and Strategic Behavior in Business 11Consumer Behavior, Utility Theory, and Game Theory 12Cardinal Utility 13Choice Behavior and Game Theory 13Utility Functions and Game-Theoretic Models 13Utility Theory and Payoffs 14Game-Theoretic Models and Illustration 14The Payoff Matrix and Tree Diagram 14Strategic Thinking and Simultaneous- andSequential-Move Games 16Rules of the Game 16Players 17Information 17Perfect vs. Imperfect Information 18Complete vs. Incomplete Information 18Symmetric vs. Asymmetric Information 18Set of Actions and Strategies ....18Payoffs '. 19Strategy and Equilibrium 19Dominant and Dominated Strategies 19Dominated Strategies 20Equilibrium 20Nash Equilibrium 22Note on Dominant Strategy Equilibrium andNash Equilibrium 23Subgame Perfect Nash Equilibrium 23Mixed Strategies; Repeated Games 23Maximin Strategy .....24Sequential Games and Problem Solving 25Complex Games and Games by Categories 27n-Person Games 27Different Categories of Games 29Zero-Sum Games vs. Non-Zero-Sum Games 29Static vs. Dynamic Games; Repeated Games 30Cooperative vs. Non-Cooperative Games 30Other Key Game Theory Concepts 31Threats and Rewards (Promises) 31Credibility 31Sample Game with Threats 31The Threat as a Strategy 32Games of Chance: Uncertainty and Risk 32Chapter 3 Modeling Games with Computer Software andExperimenting GamesPrisoner's Dilemma 36Analysis 36Notes 37Modeling the Game with MATLAB 38Tit for Tat and the Repeated Game 40Famous Experiment 40Another Prisoner's Dilemma Experiment 41Even More Experiments 42Battle of the Sexes -. 43Analysis 43Mixed Strategy 44Modeling the Original Battle of the Sexes Game with MATLAB 45A Battle of the Sexes Experiment 47Assumptions of the Researchers 48Additional Experiments 50A Sample Game of Dominated Strategies with MATLAB 50Chapter 4 A Theory of Strategic ValueIntroduction: The Game of Business 57Strategic Value for a Business 58Important Concepts : 58Advanced Topics 59Strategy and Value 60Accounting Net Worth 60Current Income 60Portfolio Investment 61Real Options 61States of Nature and Strategy 61The State of Nature 62A Short Revolutionary Example 62A Revolutionary Game: The State of Affairs in 1775 63State Variables in 1775 Colonial America 63State Variables for Business; Control Variables 65How Many Ships in Your Navy? 65The Event Tree and Dynamic Payoffs 67The Event Tree 67The Extensive Form and the Event Tree 68State and Control Variables in the Event Tree 68Encoding History in the State 68Additional Examples 69Payoffs and Business Value 69Static "Payoffs" vs. Strategic Value 69Value Changes 69Dynamic Payoffs : 70The Firm 70Equity in a Firm 71Note on Limited-Liability Companies 72Markets 72Real Options and Management Flexibility 72The Ubiquity of Uncertainty 72The Inherent Value of Management Flexibility 73The Investment Decision 74What is "Value" for a Firm? 75Earnings and Capital Gains 75Strategy and the Pursuit of "Total Return" 75Available Principles of Valuation 76Practical Models 78Example: Strategic Valuation for the Damaged Business 80Appendix 4.A Stochastic Processes, Diffusions, and Expectations...82A. Introduction 82Use of Stochastic Processes in Study of Strategic Behavior 82B. Brownian Motion and Random Events 82The Markov Property 83C. Geometric Brownian Motion and Stock Prices 83D. Expected Value 84Expected Value of a Strategy 84Appendix 4.B Dynamic Programming 85A. Optimization over Time 85B. A Prototype "Bellman Equation" for a Private Firm 85C. Recursive Decisions 85D. Existence Theory 86Chapter 5 A Dynamic Game of Asymmetric Information in theBeer IndustryA Game between a Global Brewer and a National Importer 87Background 87Motivation and Incentives of Companies: Maximizing BusinessValue 88Examples 89Business Value Depends on a Strategic Course of Action 89Implications of Value, Risk, and Strategic Decisionsto the Game 89Regulated Alcoholic Beverages Industry and Three-TierSystem in the U.S 90Sales Performance of Gambrinus; General Import Market 91Incentives at the Time of the 1996 Decision 91Incentives for Grupo Modelo 92Objectives of Gambrinus 92Matching and Conflicting Objectives ' 93Matching Objectives 93Conflicting Objectives 93Concluding Remarks on Incentives 94Strategic Options Available in 1996 and the Game 94Introduction of Strategic Options 94Strategic Options at Two Stages '. 95Potential Outcomes 95Game-Theoretic Model 96Description 96Information 96Analysis of the Game ./. 99Stage I (1996) 99Stage I (1996-2001) 101Stage II ; 102Outcomes of the Game and Conclusion 103Appendix 5.A 104Chapter 6 Consolidation in the Wine and Spirits IndustryIntroduction 109Economic Structure of the Industry 110Distribution Arrangements in the Industry 110The Wine and Spirits Industry and Consolidation I l lConsolidation at Wholesaler Level 112Recent M&As and Business Ventures in Major Marketsat Wholesaler Level 113A Hypothetical Consolidation 114Description of the Consolidation Game 116Market Share and Power 116The New Market and Strategic Issues 117Players' Strategies and Information 119Analysis of the Game 120Simultaneous-Move Game between Wholesalers iii and iv 122Sequential Move Game between Supplier III andWholesalers iii and iv 122Conclusion 124Appendix 6.A 125Chapter 7 A Regulatory Game: CAFE Standards and CompetingAutomakersIntroduction 129Lobbying and Game Theory 130Lobbying as Part of the Game 130History of Corporate Average Fuel Economy (CAFE) 131Future Standards: Energy Independence and Security Act of2007,2011-2015 Targets 135Current Debates 137Strategic and Game Theoretical Motivation behind CAFE 138Building the Game and Players, Strategies, Payoffs,and Solution 140Game Stage 1 140Game Stage 2 141Outcomes of GameStages 1 and 2 142Game Stage 3 143Solving the Problem and Nash Equilibrium 144Conclusion 146Appendix 7.A 147Chapter 8 Business Strategy and Crisis: The U.S. Auto IndustryIntroduction and Cause of the 2008 Auto Industry Crisis 149Likely Scenarios for the Automotive Industry 150Economic and Industry Conditions 152Sales Trends by Automaker 153Car Sales 153Truck Sales 154Long-Term Sales Trends 154Investor Confidence in Domestic Automakers and Suppliers 155Key Events to Date (December 2, 2008) 155Discussion of Potential Scenarios 158The Most-Likely Scenario 159Scenario 1: A GM-Chrysler Merger with Federal Financial Aid ...159Other Likely Scenarios 160Scenario 2: Federal Financial Aid and Radical Restructuringoutside of Bankruptcy 160Scenario 3: Federal Financial Aid and Radical Restructuringoutside of Bankruptcy; Chrysler Assets Purchased byCompetitors 160Scenario 4: Chrysler Files for Chapter 11 Bankruptcy;GM and Ford Restructure outside Bankruptcy 160Scenario 5: Both GM and Chrysler File for Chapter 11Bankruptcy 161Strategic Approach to a Potential Merger: Strategiesof Key Players 161Players and Incentives 162Incentives of the Players 162Strategies 163Sample Tree Diagrams Illustrating Players' Movesand Their Strategies 164Strategic Analysis and Conclusion 167Chapter 9 Game Theory and the LawIntroduction 169Classic Game Theory Applications in Litigation 170Incentives to Settle 170Example: Litigation or Settlement in a CommercialDamages Case 170" Optimal Sanctions 172Example: "Punitive" Damages 172Properly Constructing the Payoff Matrix 173Examples: The Actual Payoff Elements 173Commercial Damages : 174Overview of Commercial Damages 174Events in a Typical Commercial Damages Case ..: 175Evaluating Commercial Damages Using Game Theory 175The Value of Investments under Uncertainty 176Game Theory and Real Options v. :...177Extensive Form Modeling of an Investment Outcome 177A Simulation Model for Real Options and Game TheoryValuation 178Results of Experiment Using Simulation Model 179Game Theory and Antitrust Law 181Market Entry and Collusion 181Example 181Antitrust Case Study: United States of America,et al., v. Microsoft Corporation 182History of Investigations Leading up to the Antitrust Suit 183Market Power: Windows and Internet Explorer 184Major Competitors 184A Game-Theoretic Model of the Microsoft Antitrust Case 185Key Incentives 186Analysis of Microsoft's Decision Tree 186The Trial and Conclusions of Law 187The Appeal 188The Settlement , 188Appendix 9.A 190Bibliography ...193Index 199


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