Game Theory Lecture 7
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Questions and Answers

What is the main strategy Boeing might use to deter Airbus from entering the market?

  • Increase production capacity
  • Offer price discounts to customers
  • Collaborate with European governments
  • Foster an image of irrationality and belligerence (correct)

    • Why did Wal-Mart succeed in small towns while other discount stores struggled?

  • They were the first discount store in larger cities.
  • They offered significantly lower prices.
  • They had a larger variety of products.
  • They created local monopolies. (correct)

    • In the original payoff matrix, what is Boeing's outcome if it decides to produce while Airbus does not?

  • 100 (correct)
  • 120
  • –10
  • 0

    • What was the conventional wisdom regarding discount stores in the 1960s?

    <p>They could only succeed in cities with at least 100,000 residents.</p> Signup and view all the answers

    How does the European government subsidy affect Airbus's production decision?

    <p>It assures Airbus a profitable outcome regardless of Boeing's actions.</p> Signup and view all the answers

    What is the result for Boeing if both it and Airbus choose to produce?

    <p>It earns a negative payoff of –10.</p> Signup and view all the answers

    What strategy did Wal-Mart use to stay ahead of competitors?

    <p>Preemptive establishment of stores.</p> Signup and view all the answers

    By 1999, how many stores did Wal-Mart operate in the United States?

    <p>2454</p> Signup and view all the answers

    What change occurs in the payoff for Airbus if it produces aircraft after receiving a subsidy?

    <p>It earns a total of 120.</p> Signup and view all the answers

    What is a Nash equilibrium in the context of the discount store preemption game?

    <p>A state where neither company can improve their outcome by changing their action.</p> Signup and view all the answers

    What does the lower left-hand corner of the payoff matrix represent for Boeing and Airbus?

    <p>Neither firm producing any aircraft.</p> Signup and view all the answers

    What is a long-term effect of the subsidy on the aircraft market?

    <p>It allows both companies to profitably develop new airplanes.</p> Signup and view all the answers

    What does entry deterrence require from an incumbent firm?

    <p>Demonstrating that entry would be unprofitable.</p> Signup and view all the answers

    What was Wal-Mart's annual profit by 1986?

    <p>$450 million</p> Signup and view all the answers

    What does the term 'entry deterrence' refer to in the context of the aircraft market?

    <p>Creating conditions that dissuade potential competitors.</p> Signup and view all the answers

    What market strategy did Wal-Mart continue to pursue in recent years?

    <p>Establishing supercenters.</p> Signup and view all the answers

    What is a potential risk of Far Out's strategic commitments?

    <p>It could result in bankruptcy if assumptions about the market are incorrect.</p> Signup and view all the answers

    In the production decision table for complementary goods, what is the Nash equilibrium?

    <p>(A, B)</p> Signup and view all the answers

    What strategy is indicated by Firm 1’s approach towards joining the consortium?

    <p>A conditional strategy based on Firm 2's actions.</p> Signup and view all the answers

    What factor contributes to a firm’s bargaining power according to the context provided?

    <p>Having credible threats that can influence outcomes.</p> Signup and view all the answers

    How does Wal-Mart's strategy differ from traditional department stores?

    <p>By relying on size and high inventory turnover to reduce prices.</p> Signup and view all the answers

    What is a dominant strategy for Firm 2 in the production decision scenario?

    <p>Producing B regardless of Firm 1's action.</p> Signup and view all the answers

    What benefit does Firm 2 derive from producing product A in relation to Firm 1's commitment?

    <p>Improved payoffs if Firm 1 enters the consortium.</p> Signup and view all the answers

    What can be inferred if Far Out commits to producing big engines?

    <p>It could lead to unfavorable comparisons if competitors innovate.</p> Signup and view all the answers

    What is the main strategy Firm 1 must employ to convince Firm 2 to produce the sweet cereal?

    <p>Launching an expensive advertising campaign</p> Signup and view all the answers

    What outcome prevails in the pricing game between Firm 1 and Firm 2 according to the matrix?

    <p>Firm 2's low price is a dominant strategy leading to a specific outcome</p> Signup and view all the answers

    Why is Firm 1's threat to charge a low price ineffective against Firm 2?

    <p>Both firms can threaten each other similarly</p> Signup and view all the answers

    How can Firm 1 effectively make its threat credible to Firm 2?

    <p>By publicizing a commitment to produce a large quantity of sugar</p> Signup and view all the answers

    Which entry in the payoff matrix represents the scenario where both firms charge high prices?

    <p>100, 80</p> Signup and view all the answers

    What must Firm 1 do to ensure a strategic advantage over Firm 2?

    <p>Establish credibility through commitments</p> Signup and view all the answers

    In the product-choice problem, which option leads to the best outcome for Firm 1?

    <p>Firm 1 being first to market with sweet cereal</p> Signup and view all the answers

    What could make Far Out's threat to produce big engines credible?

    <p>Reducing small engine production capacity</p> Signup and view all the answers

    What is the outcome if Firm 1 charges a low price while Firm 2 charges a high price?

    <p>Firm 1 receives a payoff of 20</p> Signup and view all the answers

    Why is Firm 1's threat to charge a low price not credible against Firm 2?

    <p>Firm 1 will incur significant losses if it charges low prices</p> Signup and view all the answers

    What would be Race Car's best response knowing Far Out's modification to produce big engines?

    <p>Produce big cars</p> Signup and view all the answers

    What would happen to the payoff matrix if Far Out destroyed its small engine production capacity?

    <p>The payoffs for small cars would change</p> Signup and view all the answers

    What does the modified payoff structure imply for Race Car's decision-making?

    <p>Race Car must prioritize big car production for higher payoffs</p> Signup and view all the answers

    If Firm 1 threatens to charge a low price, what is likely to be the impact on Firm 2's pricing strategy?

    <p>Firm 2 will charge high prices regardless</p> Signup and view all the answers

    What is the outcome for Firm A if Firm B chooses not to advertise?

    <p>Firm A will choose to not advertise.</p> Signup and view all the answers

    Which of the following best defines the term 'dominant strategy'?

    <p>A strategy that leads to the highest payoff regardless of competitors' actions.</p> Signup and view all the answers

    What represents a sequential game?

    <p>Players take turns to make decisions, considering each other's past actions.</p> Signup and view all the answers

    What is one implication of both firms opting to introduce sweet cereal simultaneously in the product choice game?

    <p>Both firms will incur losses.</p> Signup and view all the answers

    In the context of the extensive form of a game, what is a decision tree used for?

    <p>To visualize the possible moves and reactions of players.</p> Signup and view all the answers

    What could be inferred if Firm A has no dominant strategy?

    <p>Firm A's decision solely relies on Firm B's actions.</p> Signup and view all the answers

    Which of the following is NOT a characteristic of a game with a dominant strategy?

    <p>The strategies are always affected by the opponents’ actions.</p> Signup and view all the answers

    Study Notes

    Game Theory Lecture 7

    • Game theory explores situations where players make strategic decisions, considering each other's actions and likely responses.
    • Payoff refers to the value associated with each possible outcome of a game.
    • A strategy is a rule or plan of action for playing a game.
    • An optimal strategy maximizes a player's expected payoff, assuming rationality in competitors.
    • Determining optimal strategies can be complex, even with complete information.

    Cooperative vs. Noncooperative Games

    • Cooperative games involve binding contracts allowing participants to plan joint strategies.
    • Noncooperative games lack negotiation and enforcement of binding contracts.
    • Cooperative games have binding contracts, but noncooperative games lack them.

    Dominant Strategies and Nash Equilibrium

    • Dominant strategy: A strategy that's the best choice regardless of what an opponent does.
    • Nash equilibrium: A situation where each player is doing the best they can given the choices of the others.
    • Optimal strategies are difficult to determine, even in symmetrical environments.

    Sequential Games

    • Sequential games involve players moving in turn, responding to each other's actions.
    • Players might act sequentially, potentially setting outputs before others.
    • The Stackelberg model is an example of a sequential game.
    • Possible actions and rational reactions of each player are crucial in sequential games.

    Threats, Commitments, and Credibility

    • Credible threats are believable threats that influence opponent's behavior.
    • Threats are more effective with an element of commitment.
    • Empty threats are not credible, as firmness is necessary to persuade an opponent.

    Entry Deterrence

    • Entry deterrence is when an incumbent firm discourages new competitors.
    • Successful entry deterrence requires convincing potential competitors that entry will be unprofitable.
    • Strategies for entry deterrence include creating barriers to entry or demonstrating a firm commitment to fighting new entrants.
    • The concept of credible threats is important in the face of entry deterrence.

    Bargaining Power

    • Credible threats influence bargaining power effectively.
    • Credible threats are crucial in bargaining situations, such as local markets.
    • Credibility of threats plays a key role in bargaining scenarios.

    Example: Wal-Mart's Strategy

    • Wal-Mart's expansion strategy involved opening stores in smaller towns and cities.
    • This strategy effectively created "local monopolies" and preempted other retailers.
    • Wal-Mart's success highlights preemptive investment strategies and their effectiveness in limited markets.

    Example: Commercial Aircraft Market

    • The development of new aircraft can create situations where only one company can produce them effectively.
    • The payoff matrix illustrates the success of competitive strategies and potential advantages of preemption.
    • Subsised markets can influence the outcomes of product development success in the market.

    Additional Resources

    • Pindyck & Rubinfeld (2015), "Microeconomics", 8th edition
    • Digital business disruption research articles (additional reading)

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    Lecture 7 - Game Theory - 5ECON010C PDF

    Description

    Explore the intricacies of game theory in Lecture 7, focusing on concepts such as payoff, optimal strategies, and the distinction between cooperative and noncooperative games. Understand the significance of dominant strategies and Nash equilibrium in strategic decision-making among rational players.

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