Strategic Management/ Business Policy

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Strategic Management/ Business Policy

• Power Point Set 11 Game Theory

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Game Theory and Strategy

• Key Concept
  Preemption of Strategically Valuable Assets
• Access to raw materials (e.g., Alcoa)
• Wal-marts rural strategy

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Analyzing Competitive Dynamics Commitment Vs.
Flexibility

• Commitment
• Game Theoretic preemption strategy
• Flexibility
• Real (Strategic) Options Analysis

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Game Theory and Strategy

• Prisoners Dilemma Game

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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).

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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.

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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.

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Game Theory and Strategy

• Game with no dominant strategy equilibrium, but a
  Game with one Nash equilibrium

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Game Theory and Strategy

• A cooperative game with conflict
• Game with multiple (two) Nash equilibria

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Game Theory and Strategy

• Suppose this game were played sequentially?
• Would it be better to go first or second?

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Game Theory and Strategy

• Would you want to move first or second?

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Game Theory and Strategy

• Joint Venture

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How Can Commitment Affect A Competitors
Response?

• Commitment An Irreversible Action (Sunk
  Costs)

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How Can Commitment Affect A Competitors
Response?

• Mutual sunk cost commitments

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Game Theory and Strategy

• Lessons 1
• Commitment (sunk costs) can be
  used to achieve cooperation.
• The importance of mutual economic hostages The
  wise manager should think beyond Machiavellis
  myopic approach to contracting and should seek
  both to give and receive credible (sunk cost)
  commitments that facilitate ongoing relationships
  and adaptation.

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Game Theory and Strategy

• Initial Game (played simultaneously)

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How Can Commitment Affect A Competitors
Response?

• Commitment An Irreversible Action (Sunk Costs)
• Competition In The Commercial Aircraft Industry

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Game Theory and Strategy

• Lessons 2
• 2. Commitment (sunk costs) can be used
  to achieve competitive advantage.
• Preemption strategy