Session 16: Wrap up 1 1. Strategic commitment (from Session 15). - PDF document

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 1 Session 16 • Wrap up Session 16: Wrap up 1 1. Strategic commitment (from Session 15). ➥ 2. Entry as a congestion game. 3. Wrap up. Part of An entry deterrance game 2 Exercise 15.1 The figure below illustrates the following strategic situation involving Sony, which currently has a monopoly in the Discman, and JVC, which may enter the market. JVC Enter Stay out Sony Sony High Low High Low output output output output ( 5 , -2 ) ( 6 , 6 ) ( 12 , 0 ) ( 8 , 0 )

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 2 Session 16 • Wrap up Suppose Sony is making plans to build a new plant 3 Sony Large plant Small plant JVC JVC Enter Stay out Enter Stay out Sony Sony Sony Sony Low Low Low Low High High High High output output output output output output output output ( 4 , -2 ) ( 3 , 6 ) ( 11 , 0 ) ( 5 , 0 ) ( 5 , -2 ) ( 6 , 6 ) ( 12 , 0 ) ( 8 , 0 ) Pricing game from Session 12 4 Firm B Low Med High 19 18 10 Low 20 25 33 24 28 22 Med Firm A 23 31 38 30 40 34 High 15 27 42

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 3 Session 16 • Wrap up Suppose that Firm B can commit to its price first 5 Firm B Low Med High ( 24 , 23 ) ( 28 , 31 ) Firm A ( 34 , 42 ) Firm A Firm A Low Med High Low Med High Low Med High ( 30 , 15 ) ( 28 , 31 ) ( 10 , 33 ) ( 19 , 20 ) ( 24 , 23 ) ( 18 , 25 ) ( 40 , 27 ) ( 22 , 38 ) ( 34 , 42 ) Summary: What are Stackelberg games? 6 From these ingredients: two players: 1 and 2 player 1 chooses action A 1 and player 2 chooses action A 2 We can have three different strategic situations, depending on the timing: Simultaneous moves Sequential game in which player 1 moves first Sequential game in which player 2 moves first Such sequential games are called Stackelberg games . Player who moves first is the leader ; other player is the follower .

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 4 Session 16 • Wrap up Summary: What about Stackelberg games? 7 They let us see how timing and strategic commmitment matter. Who is behaving differently in Stackelberg vs. Nash? Follower? Leader? Preemptive investments 8 Your firm is first to develop the next generation memory chip. You thus will be the first firm to install capacity. What are you thinking?

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 5 Session 16 • Wrap up Wrap up on strategic commitment 9 When you have the chance to commit, think about: 1. In what way you want to influence the other players’ actions. 2. How you can achieve this. Session 16: Wrap up 10 ✓ 1. Strategic commitment (from Session 15). ➥ 2. Entry as a congestion game. 3. Wrap up.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 6 Session 16 • Wrap up Congestion games 11 What do these situations have in common? 1. Entering a market. 2. Going to study at the INSEAD library. 3. Entering a random draw for free tickets to a concert. 4. Deciding whether to focus on the finance job market. Congestion games — simple version 12 Simplification: “How many” not “who” . Each player cares about how many other players are in, but not on their identities.