Strategic Games Outline PDF

Introduction **Strategic Games\ **- also called game theory \- individuals or entities make decisions by considering the potential choices of others \- this is used or practiced to anticipate others\' actions and respond in a way that maximizes their benefit [- it\'s like playing chess, every mo...

Introduction **Strategic Games\ **- also called game theory \- individuals or entities make decisions by considering the potential choices of others \- this is used or practiced to anticipate others\' actions and respond in a way that maximizes their benefit [- it\'s like playing chess, every move matters, not just your own, you also have to think about what your opponent might do next] [- requires strategic thinking, which involves planning, evaluating risks, and making calculated decisions to improve or maintain positioning] 3 Elements of a Strategic Game/Key Features of a Strategic Game\ 1. Players\ 2. Strategies\ 3. Payoff How is it useful to the business industry? 1\. Competitive Advantage 2\. Knowing When to Peak 3\. Better Pricing Strategies and Decision-Making 4\. Cooperation and Negotiation 5\. Risk Control/Management **Sequential-Move Games** - deciding on a strategy. - having to move. - familiar to anyone who has ever used a decision tree. *Real Life Example:* - - **Simultaneous-Move Games** In game theory, the players do not observe the rival's decision before deciding on their own strategies. To analyze these games, we use the matrix or strategic form of a game. ex. Rock, Paper, Scissors Real-life situations: \- Two persons interrogated separately and at the same time. Related to Business: \- Two companies have a similar product, they chose what strategy they are going to use. This table illustrates two companies\' choices without knowing others choice\'s and what outcomes they would get depending on their choices. Person 1 Person 2 ---------- ---------- ---------- ---------- Choice 1 Choice 2 Choice 1 5, 5 3, 10 Choice 2 10, 3 2, 2 Nash Equilibrium\ - **Nash Equilibrium is an outcome of a game in which two or more players have a strategy, and with each player considering an opponent's action or strategy, has no incentive, nothing to gain, by switching or changing strategy.** \- In the Nash Equilibrium, each player\'s strategy is optimal when considering the decisions of other players. Every player wins because everyone gets the outcome they desire. \- To quickly test if the Nash equilibrium exists, reveal each player\'s strategy to the other players. If no one changes his strategy, then the Nash Equilibrium is proven. \- **Nash Equilibrium also refers to the no regrets equilibrium wherein the best response to the best response wherein a player can say, given what they did, \"My best response is the strategy I made\"** **There are particular situations that poses the application of Nash Equilibrium, these situations are illustrated in the following:** Product Release Timing in Technology Industry\ Advertising Allocation in Rival Companies\ Pricing in Airline Industry\ War, particularly dispute of China and Philippines concerning the West Philippines Sea **Dominant Strategy** \- action/strategy that a player should take regardless of what the other player does \- best response to all possible actions of opponent **PRISONERS\' DILEMMA** \- Prisoners\' dilemma represents two parties making a decision between cooperation or betrayal \- The optimum reward of prisoners' dilemma occurs when both parties choose to cooperate. \- It pertains to cooperation between parties and can lead to a better outcome. \- It leads to protection of both parties \- It was developed in 1950 by RAND Corporation mathematicians Merrill Flood and Melvin Dresher during the Cold War **HOW DOES IT AFFECT A BUSINES**S \- Implementation of different pricing strategies \- It can lead to suboptimal outcomes \- One-sided Cooperation  **EXAMPLE OF PRISONERS' DILEMMA** -Coca-Cola and Pepsi\ \ \ \ \ \ \ \ \ **PRICE DISCRIMINATION DILEMMA\ ** \- A pricing strategy which sells the same product differently based on demand and the willingness for consumers to pay \- It can be use for competition but makes it worse if many competitors uses it \- degrees of price discrimination \- 1st degree \- 2nd degree \- 3rd degree **EFFECTS TO A BUSINESS** \- Increase in revenue \- Market Penetration \- Risk of backlash Example: The Airports/Airlines Industry\ \ **WHEN PRISONERS DILEMMA IS REPEATED** \- When prisoners' dilemma is repeated it makes it easier to get out of bad situations \- It builds more cooperation between players/parties \- Promotes trust, cooperation and collaboration \- It also uses tit-for-tat strategy when it is repeated **Rules that may be used** Be nice: Start by cooperating, and don\'t strike first. Be easily provoked: Respond immediately to rivals Be forgiving: Don\'t try to punish other players too much Don\'t be envious: Focus on your own slice of the profit pie, not on your competitor\'s Be clear: Make sure your competitors can easily interpret your actions **Effect to a business** \- Builds Trust \- Mutual Benefits \- Leads to more favorable outcomes **ADVERTISING DILEMMA** - - - B Doesn\'t advertise B Advertise ---------------------- ------------------------------------------------- ---------------------------------------------------- A Doesn\'t Advertise Both save money and market share stays the same B gains market share while A losses A Advertise A gains market share while B losses Both spend heavily and market share stays the same - Example : The classic example of the advertising dilemma is from the 1970s when R.J. Reynolds and Philip Morris were spending vast sums of money on TV advertising to promote their cigarette brands. Real life examples Fast food advertising: Mcdo and Burger King  Destruction to business - **FREE-RIDING DILEMMA** - - - B Works hard B free-ride -------------- ------------------------ ------------------------ A Works hard Both getting A+ Getting a decent grade A Free-ride Getting a decent grade Failing grade Example: Workplace teams How does it affect the business? 1. 2. 3. **GETTING OUT OF PRISONER\'S DILEMMA** From suboptimal equilibrium to cooperative outcome Suboptimal outcome ( not the best outcome) Optimal outcome Work on developing long-run strategies that change the structure of the game 1. Ex. Soft-drinks  2. - Ex. Tobacco Industry ( Banned cigarette advertising ) **Other Games** **Game of Chicken** is a model of strategic decision-making in which two individuals or groups engage in a confrontational situation, each refusing to back down from a course of action that would lead to a catastrophic outcome for both parties. The name derives from the dare of two drivers steering their cars towards each other, with the first one to swerve being the \'chicken\' who loses face. **B Swerve** **B Stay** --------------- -------------- ------------ **7A Swerve** (0,0) (0,1) **A Stay** (1,0) (-10,-10) **Role of communication, cooperation, trust and commitment** - - - **Examples** Business: Two competing companies launching a new product into the market. Both firms want to set a high price to maximize profits. Real life: Territorial Dispute in West Philippine Sea **Shrinking / Monitoring Game** describes a situation where there is a principal (such as an employer) and an agent (such as an employee). **Employee Work** **Employee Shrink** ---------------------------- ------------------- --------------------- **Employer Monitor** (5,5) (-1,0) **Employer Don't Monitor** (10,5) (-10,-10) **Strategies to minimize shrinking in a wokplace setting** - - - **Examples** Business: Employee's monthly assessment or evaluation Real- life: Accomplishing roup activities / research **Dating game** shares the tension between group interest (cooperation) and self-interest (conflict) inherent in a prisoners' dilemma. Business examples: In a partnership, the partners decided on what equipment they are going to buy based on their budget and needs. Real-life situations: A couple decided where would they go based on each other\'s desires yet both want the company of the other. Person 1 Person 2 ---------- ---------- ---------- ---------- Choice 1 Choice 2 Choice 1 1, 4 0,0 Choice 2 2, 2 4, 1 **INTRODUCTION TO BARGAINING** -Bargaining is the negotiations, communication between two or more parties to reach an agreement (mutual agreement) by making offers and counter offers. 1. Example:**2023 United Auto Workers (UAW) strike against major U.S. auto manufacturers** 1\. **Starting Point: Union's Decision** **Union's Decision (Top of the tree)** 2\. **Management's Decision (After Union's Low Offer)** **Management's Decision (branching from Union's Low Offer)** 3\. **Management's Offer (After Rejecting Union's Low Offer)** **Management's Offer (continuing from Reject Low Offer)** 4\. **Union's Decision (After Management's Low Offer)** **Union's Decision (after Management's Low Offer)** 5\. **Commitment and Lockout** **Management's Lockout Option (if negotiations fail or union rejects)** 2. - - - - - - - - -