Strategic Thinking

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Strategic Thinking

• IMBA Managerial Economics
• Jack Wu

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Coke vs. Pepsi, 1999
Nov. 16 Coca-Cola raised price 7 Nov. 22
Pepsi raised price 6.9 Coke and Pepsi will
move now from price-based competition to
marketing-based competition, Andrew Conway,
Morgan Stanley
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Competitive Dilemma
What should Coke do?
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Strategic Situations

• parties actively consider the interactions with
  one another in making decisions
• game theory -- set of ideas and principles to
  guide strategic thinking
• simultaneous actions strategic form
• sequential actions extensive form

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Dominated Strategy

• generates worse consequences than another
  strategy, regardless of the choices of the other
  parties
• never use dominated strategy

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Nash Equilibrium

• Given that the other players choose their Nash
  equilibrium strategies, each party prefers its
  own Nash equilibrium strategy
• No one is willing to deviate unilaterally from a
  Nash equilibrium

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Solving for Nash Equilibrium

• eliminate dominated strategies, then check
  remaining cells
• arrow technique

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Coke and Pepsi Game

• Nash equilibrium for both parties, raise
  price is dominated by discount.
• but discounting is bad for both -- if only they
  could agree somehow to raise price.
• Coke and Pepsi stuck in this situation for four
  years until November 1999.

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Radio Formats
Merkur Merkur
Lite AC no change
Jupiter Hot AC J 60, M 40 J 60, M 40
Jupiter no change J 70, M 30 J 50, M 50
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Radio Formats

• For Merkur, Lite AC is dominated by no
  change so consider only no change,
• assuming Merkur chooses no change, Jupiter
  should choose Hot AC.
• Repeat using arrow technique.

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Out of Nash Equilibrium

• What if another player doesnt play Nash
  equilibrium strategy?
• Nash equilibrium strategy may not be best
• still dont use dominated strategy

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WHERE TO ADVERTISE?
No Nash equilibrium in pure strategies
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Randomized Strategies

• choose among pure strategies according to
  probabilities
• must be unpredictable
• Example retail market random discount
• Example where to advertise
• _ We.com ½ NBA and ½ NHL
• _ Competitor.com ½ NBA and ½ NHL

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Evening News
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Coordination and Competition

• Prime time for news is 80pm second best is
  730pm
• since audience is limited, get maximum
  viewership if two channels schedule at different
  times.
• Question which station gets 80pm? Situation
  has elements of
• coordination -- avoiding same time slot
• competition -- getting the 80pm slot

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Zero/Positive Sum

• zero-sum games pure competition -- one party
  better off only if other is worse off
• positive-sum games coordination -- both can be
  better off or both worse off
• co-opetition competition and coordination

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Adopting Database Software
Sol Sol
IBM Oracle
Venus IBM V 1.5, S 1.5 V 1, S 1
Venus Oracle V 1, S 1 V 1.5, S 1.5
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Focal Point

• Nash equilibrium
• multiple Nash equilibria

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Sequencing

• Game in extensive form sequence of moves
• nodes
• branches
• outcomes

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Extensive Form Equilibrium

• backward induction
• final nodes ? intermediate nodes ? initial node

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TV News Sequential Moves
TVB, ATV

4, 3
730
800
ATV
2.5, 2.5
800
TVB
1, 1
730
730
ATV
800
3, 4
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Strategic Move

• Action to influence beliefs or actions of other
  parties in a favorable way
• credibility
• first mover advantage
• second mover advantage

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Examples

• Examples
• Evening TV news -- both stations want to move
  first which one can?
• Use strategic move, eg, contracts with
  advertisers to deliver news at 8pm.
• Famous Chinese general after crossing a river,
  burnt his ships -- strategic move to force
  soldiers to fight harder.
• Issue Is the move credible? Will it convince
  the other players?
• Advantage doesnt always go to first mover
• In war, better to see opponents move, and then
  take action, eg is enemy moving south or north?
• new product category -- let competitor test the
  market and educate the customers

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Lithographer

Make more prints
Buy
Litho
Make prints
consumer
Do not
Do not
Litho
(1) serial number (2) destroying the plate (3)
other solution?
Do not
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Conditional Strategic Moves

• threats
• promises

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MORGAN STANLEYSHAREHOLDER RIGHTS PLAN

• If any party acquires 15 or more of companys
  shares, other shareholders get right to buy
  additional shares at 50 discount.
• Impact on hostile bidder?

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Shareholder Rights Plan

• This shareholder rights plan is a threat to
  potential bidders
• most hostile bidders begin with small stake
• with shareholder rights plan, if bidder acquires
  more than 15, then rights triggered, and bidder
  will be diluted.
• Nickname poison pill.
• Actually works against shareholder rights -- by
  entrenching existing management.

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Poison Pill
Hilda loses on initial stake cost of takeover
rises

activates rights
acquires 100,000 shares
Sharon
Hilda

does not
doesnt bid
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Strike

Lose current wage and possibly gain in future wage
strike
reject union demand
Union
do not
Maintain current wage
Employer

accept
Why are strikes rare in American professional
football?