Learning Outcomes

Learning Outcomes • Mahasiswa akan dapat menghitung penyelesaian model permainan berbagai contoh aplikasi/kasus.

Outline Materi: • Konsep Dasar permainan • Model Permainan • Aturan model Permainan • Equiliribium & Strategy. • Contoh kasus..

Finding the reaction curves • Reaction curve: given the output of X, what output of Y is optimal? • Of course, whatever Y does, will produce further reactions, i.e. X isnotconstant in general. • Equilibrium only when both firms „sit“ on their reaction curves: no surprises and no incentive to alter the behavior

Prisoner’s dilemma Possible strategies for Mulloy Possible strategies for Jones Confess Do not confess Jones: 8 years Jones: 2 years Mulloy: 8 years Mulloy: 10 years Jones: 10 years Jones: 4 years Mulloy: 2 years Mulloy: 4 years Confess Do not confess

One-shot games vs. Repeated games I • Assume a cartel game: 2 firms want to set the price high to maximize profits in the cartel. • But each firm has an incentive to cheat and reduce its price • Cooperation is very difficult to establish if players interact only once (one-shot game) • Only Nash-equilibrium is low/low. • Why is it that you do observe cartels (cooperation) in real life??? • Players in real life do not interact only once, they interact more often • Benefits of cooperation are higher if agents can interact more often • Repeated game: gains from cooperation are much higher

One-shot vs. Repeated games II • Suppose game goes on for several periods • If one player cheats, the other can punish him later (set also a low price) • Tit-for-tat strategy: each player should do, what the other did in the previous round: solves cooperation problem • Does it work also, if there are only 10 periods? • Use backward induction (i.e. look at last period!) • End-game problem

Does cheating pay? Possible strategies for Farmer Possible strategies for Acron Abide by agreement Cheat Acron’s P: $5 million Acron’s P: -$2 million Farmer’s P: $5 million Farmer’s P: $8 million Acron’s P: $8 million Acron’s P: $2 million Farmer’s P: -$2 million Farmer’s P: $2 million Abide by agreement Cheat

Most-favored-customer clauses • If the firm reduces its price subsequent to a purchase, the early customer will get a rebate so that he or she will pay no more than those buying after the price reduction • Or: you get a rebate, if you see the product cheaper somewhere else. ==> Bestpreisgarantie • Looks like a very generous (consumer-friendly) device. • But: clever agreement to keep cartel discipline alive. • U.S. Justice Department sees such clauses as “tacit coordination” between oligopolists

Payoff Matrix beforeMost-favored-customer clause

Payoff Matrix afterMost-favored-customer clause

Non-credible threatsAssume: Gelhart wants to deter price cut by rival by a commitment of retaliation Possible strategies for LIV Possible strategies for Gelhart Low price High price Gelhart’s P: $2 million Gelhart’s P: $3 million LIV’s P: $3 million LIV’s P: -$1 million Gelhart’s P: $7 million Gelhart’s P: $11 million LIV’s P: $11 million LIV’s P: $8 million Low price High price Gelhart will lose money by retaliating. Maybe reputation of being “reckless” (regardless of costs) could help.

Example for non-credible threat: NATO nuclear strategy • Mutually assured destruction: in case of a first strike by the Russians, U.S. threatens to retaliate by basically destroying the world. • But after the first strike, this strategy is not credible anymore, because payoffs for U.S. will further fall. • Remedy: construct automatic counter-attack device ==> serves as a self-binding commitment device

Deterrence of entry ISalem has first move Possible strategies for Salem Possible strategies for Lotus Do not enter Enter Lotus’s P: $3 million Lotus’s P: $13 million Salem’s P: $6 million Salem’s P: $9million Lotus’s P: $4 million Lotus’s P: $13 million Salem’s P: $12 million Salem’s P: $9 million Resist entry Do not resist entry

Deterrence of entry IILotus makes credible threat to resist: excess capacity Possible strategies for Salem Possible strategies for Lotus Do not enter Enter Lotus’s P: $3 million Lotus’s P: $11 million Salem’s P: $6 million Salem’s P: $9million Lotus’s P: $2 million Lotus’s P: $11 million Salem’s P: $12 million Salem’s P: $9 million Resist entry Do not resist entry Excess capacity decreases Lotus’ profits in 3 out of 4 cases

Case study In the 1960s, Procter and Gamble recognized that disposable diapers could be made a mass-market product, and developed techniques to produce diapers at high speed and correspondingly low cost. The result: it dominated the market. According to Harvard’s Michael Porter, who has made a careful study of this industry, the following were some ways in which Procter and Gamble might have signalled other firms to deter entry.

Decision tree Expand HP Compaq = $50HP = $50 Expand Compaq = $150HP = $60 Don’t expand Compaq Compaq = $60HP = $120 Expand Don’t expand Compaq = $80HP = $80 HP Don’t expand Compaq acts first: but resolve the tree from right to left!

Battle of the sexes Sam and Dolly would like to go out on Saturday night: Either to Disco or to Boxing, but together would be better Coordination pays Chicken game John and Jack race with the car against each other See „Rebel without a cause“ with James Dean Other fun games

Terima kasih, semoga berhasil..

Learning Outcomes