Session 16: Wrap up 1. Strategic commitment (from Session 15). - PowerPoint PPT Presentation

Session 16: Wrap up ➥ 1. Strategic commitment (from Session 15). 2. Entry as a congestion game. 3. Wrap up. Session 16 • Wrap up Slide 1 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Part of An entry deterrance game 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 Low Low High High output output output output ( 5 , -2 ) ( 6 , 6 ) ( 12 , 0 ) ( 8 , 0 ) Session 16 • Wrap up Slide 2 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Suppose Sony is making plans to build a new plant Sony Large plant Small plant JVC JVC Enter Stay out Enter Stay out Sony Sony Sony Sony High Low High Low High Low High Low output output output output output output output output ( 4 , -2 ) ( 3 , 6 ) ( 11 , 0 ) ( 5 , 0 ) ( 5 , -2 ) ( 6 , 6 ) ( 12 , 0 ) ( 8 , 0 ) Session 16 • Wrap up Slide 3 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Pricing game from Session 12 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 Session 16 • Wrap up Slide 4 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Suppose that Firm B can commit to its price first 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 ) Session 16 • Wrap up Slide 5 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Summary: What are Stackelberg games? 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 . Session 16 • Wrap up Slide 6 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Summary: What about Stackelberg games? They let us see how timing and strategic commmitment matter. Who is behaving differently in Stackelberg vs. Nash? Follower? Leader? Session 16 • Wrap up Slide 7 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Preemptive investments 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? Session 16 • Wrap up Slide 8 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Wrap up on strategic commitment 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 Slide 9 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Session 16: Wrap up ✓ 1. Strategic commitment (from Session 15). ➥ 2. Entry as a congestion game. 3. Wrap up. Session 16 • Wrap up Slide 10 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Congestion games 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. Session 16 • Wrap up Slide 11 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Congestion games — simple version Simplification: “How many” not “who” . Each player cares about how many other players are in, but not on their identities. Session 16 • Wrap up Slide 12 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets