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Power Point Set 9c: Game Theory and Strategy
Game Theory and Strategy
Key Concept: Preemption of Strategically Valuable Assets
Access to raw materials (e.g., Alcoa)
Wal-mart’s rural strategy
Analyzing Competitive Dynamics Commitment Vs. Flexibility
Commitment
Game-theoretic preemption strategy
Flexibility
Real (Strategic) Options Analysis
3
Game Theory and Strategy
Invisible-Hand Game
Ro
w
Wo
rk H
ard
Work Hard Shirk
Column
170
140170
140
130 120
120
130
Game Theory and Strategy
Assurance Game
Ro
w Co
op
era
te
Cooperate Defect
Column
170
120170
120
100 110
110
100
Game Theory and Strategy
Prisoners’ Dilemma Game
Ro
w Sil
en
ce
Silence Fink
Column
-1
0-1
0
-10 -8
-8
-10
Game Theory and Strategy
Prisoners’ Dilemma Game
Row Player: Dominant Strategy: Fink
Column Player: Dominant Strategy: Fink
Dominant Strategy (Nash) Equilibrium: (-8, -8)
Note: It is a dilemma since if they both cooperated by remaining silent: (-1, -1).
-1
0-1
0
-10 -8
-8
-10
Game Theory and Strategy
The Prisoners’ Dilemma Game can occur in many contexts:
What is best for an individual may not be best for a division;
What is best for a division may not be best for a firm;
What is best for a firm many not be best for an industry;
What is best for an industry may not be best for a nation; and
What is best for a nation may not be best for the world.
Game Theory and Strategy
Now that we have learned the concept of dominant
strategy equilibrium, there is a second important
equilibrium concept called a Nash equilibrium.
Note: All dominant strategy equilibrium are
Nash equilibrium, but not all Nash equilibrium
are dominant strategy equilibrium.
Game Theory and Strategy
Game with no dominant strategy equilibrium, but a Game
with one Nash equilibrium:R
ow Co
op
era
teCooperate Fink
Column
5
41
9
-1 0
0
4
Game Theory and Strategy
A cooperative game with conflict
Game with multiple (two) Nash equilibria
Man P
rize F
igh
t
Prize Fight Ballet
Woman
2
-11
-5
-5 2
1
-1
Game Theory and Strategy
Suppose this game were played sequentially?
Would it be better to go first or second?
Man P
rize F
igh
t
Prize Fight Ballet
Woman
2
-11
-5
-5 2
1
-1
Game Theory and Strategy
Would you want to move first or second?
Man P
rize F
igh
t
Prize Fight Ballet
Woman
10
10020
4
90 30
8
6
Game Theory and Strategy
Initial Game (played simultaneously)
Air
bu
s
No
Lau
nch
No Launch Launch
Boeing
400
400300
300
200 -100
-200
200
How Can “Commitment” Affect A Competitor’s Response?
Commitment = An Irreversible Action (Sunk Costs)
Competition In The Commercial Aircraft Industry
Air
bu
s
No
Lau
nch
No Launch Launch
Boeing
400
400300
300
200 -100
-200
200
Game Theory and Strategy:
Lessons #1
1. Commitment (sunk costs) can be
used to achieve competitive advantage.
• Preemption strategy
• Note: It is important to communicate
the commitment to competitors.
Game Theory and Strategy
Joint Venture
GM C
oo
pera
te
Cooperate L. Race
Toyota
112
123112
123
58 91
91
58
How Can “Commitment” Affect A Competitor’s Response?
Commitment = An Irreversible Action (Sunk Costs)
GM C
oo
pera
te
Cooperate L. Race
Toyota
112
123112
-28
58 91
-51
58
How Can “Commitment” Affect A Competitor’s Response?
Mutual sunk cost commitments
GM Cooperate
Cooperate L. Race
Toyota
112
-28112
-28
58 -51
-51
58
Game Theory and Strategy
Lessons #2:
2. Commitment (sunk costs) can be used to achieve cooperation.
The importance of mutual economic hostages: The wise manager should think beyond Machiavelli’s myopic approach to contracting and should seek both to give and receive credible (sunk cost) commitments that facilitate ongoing relationships and adaptation.
20
