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


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