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1A_Extensive_Form.ppt

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  • 1. Extensive form games
    • This lecture provides a general introduction to the course, explains the extensive form representation of games and introduces you to Comlabgames , software for designing, playing and analyzing experimental games.
  • 2. Preamble
    • Being “ strategic ” means intelligently seeking your own goals in situations that involve other parties who do not share your goals.
    • In this school “ corporate ” typically refers to a business entity, for example a corporation owned by shareholders whose interests in the firm are exclusively financial.
    • And “ management ” refers to the kind of job you will enter upon graduating from here.
  • 3. Course objectives
    • Recognize strategic situations and opportunities.
    • Summarize the essential elements in order to undertake an analysis.
    • Predict the outcomes from strategic play
    • Conduct experiments, that is “human simulations”, to verify and revise your predictions.
    • Analyze the experimental data to increase your knowledge and familiarity using simple statistics
    • Exploit such situations for your own benefit.
  • 4. Methodology and tools
      • We will draw upon
            • Cases
            • Game theory
            • Experimental methods
            • Statistics
      • The main tool we use is Comlabgames, free software you can download from:
        • www.comlabgames.com
  • 5. Cases
    • Using a case to describe a business situation is a starting point for many of the concepts we discuss.
    • In distilling the essential features of a case our goal will be to answer four critical questions:
        • Who are the main players or entities?
        • What moves by the players and chance events determine the possible outcomes?
        • How well informed are the players when making their respective decisions?
        • How does each player value the consequences of any given outcome?
  • 6. Game theory
    • A strategic situation exists when the actions of one person directly affects the payoff of someone else.
    • Game theory is the study of such interactions among players.
    • A premise of game theory is that each player pursues his or her respective objectives taking that interdependence into account.
  • 7. The experimental approach
    • Why use an experimental approach?
    • Putting yourself in the shoes of the decision maker helps you understand his or her choices.
    • Building models for conducting experiments helps you answer the four vital questions.
    • Predicting the results of your own experiment and analyzing the data from it helps you understand how your strategic rivals might react.
  • 8. Statistics
    • Why bother with a statistical analysis?
    • Using statistics helps you evaluate whether your predictions were confirmed or not.
    • As more data streams become available, managers must understand and interpret statistical analysis in an increasingly sophisticated fashion.
    • Strategic consultants must know how to conduct statistical analyses that use these data streams.
  • 9. Assessment
    • There are 2 projects : the first project is worth 35 percent and the second project is worth 65 percent.
    • See due dates in the syllabus. Each project consists of
    • Modeling an issue in business.
    • Explaining its predictions.
    • Conducting your own experiment in class.
    • Participating in the other class projects as a subject.
    • Analyzing of the data from your own experiment.
    • Projects may undertaken individually, or in groups of two to four. Each member of a group will receive the same mark.
  • 10. Introductory examples
    • To introduce you to experimental methods, let us conduct some experiments designed using the extensive form game module on the comlabgames web site.
    • Next lecture we will show how translate a case into an extensive form game.
  • 11. Food fight on Lake Erie
    • There is a Wild Oats supermarket and a Coop organic grocery in Cleveland OH selling organic food, but only a Coop in Buffalo NY.
    • There is greater demand for organic food in Cleveland than in Buffalo, mainly attributable to differences in population.
    • Whole Foods is contemplating entry into one of those markets as it expands across the Midwest into the Northeast.
    • If Whole Foods builds a new store in either location, one or both rivals might respond by cutting prices and offering the similar product lines, or they might passively accommodate Whole Foods’ high end entry.
  • 12. Whole Foods versus Wild Oats
    • If Whole Foods enters Cleveland, then the Buffalo Coop retains its monopoly in organic food.
    • In this case the profits of the existing stores in Cleveland depend on their response to entry.
  • 13. Soaking the rich
    • The goal of the Internal Revenue Service is to maximize tax revenue given the resources at its disposal.
    • The IRS audits those reporting incomes over $200,000 far more than those reporting $50,000. Similarly full time wage earners are audited much less than self employed businessmen.
    • If the IRS audited everyone, then nobody would cheat, but the costs of a universal audit are prohibitive.
    • We ask how much auditing the IRS will conduct, and how much tax fraud will occur.
  • 14. Tax Audit
    • It is more costly to undertake an audit than to only check for irregularities, and if no fraud was committed the extra tax revenue and penalties garnered is the same.
    • Undetected fraud is more lucrative to the taxpayer then committing some accounting irregularities.
    • Truthful reporting and passing over use up no resources, merely redistributing wealth from the taxpayer to the IRS.
  • 15. Developing a factory dump or an archeological site
    • As the economy shifts from the manufacturing to the service sector, former factory sites and waste dumps are rapidly becoming prime real estate.
    • Real estate developers are more savvy about parceling up land tracts and marketing them than industrial enterprises.
    • However the original factory owners know more about the sources of contaminants and pollutants on their former factory sites.
    • The law holds the current owner of a site responsible for problems caused by hazardous waste on it.
  • 16. Temporal integration
    • In this game the factory owner can develop the site by itself, but then retains full liability for all the contaminants on it.
    • Selling the site divests the factory of its liabilities for any hazardous waste on the site.
    • Should the factory owners move into real estate development?
  • 17. Game tree
    • The games we just played were represented by their extensive forms.
    • The extensive form representation answers the four critical questions in strategy:
            • Who are the players ?
            • What are their potential moves ?
            • What is their information ?
            • How do they value the outcomes?
  • 18. Who is involved?
    • How many major players are there, and whose decisions we should model explicitly?
    • Can we consolidate some of the players into a team because they pool their information and have common goals?
    • Should we model the behavior of the minor players should be modeled directly as nature , using probabilities to capture their effects on the game?
    • Does nature play any other role in resolving uncertainty, for example through a new technology that has chance of working?
  • 19. What can they do?
    • Each node designates whose turn it is. It could be a player or nature. The initial node shows how the game starts, while terminal nodes end the game.
    • A branch join two nodes to each other. Branches display the possible choices for the player who should move, and also the possible random outcomes of nature’s moves.
    • Tracing a path from the initial node to a terminal node is called a history . A history is uniquely identified by its terminal node.
  • 20. What do they know?
    • Each non-terminal decision node is associated with an information set .
    • If a decision node is not connected to a dotted line , the player assigned to the node knows the partial history .
    • If two nodes are joined by a dotted line, they belong to the same information set, and the two sets of branches emanating from them, which define the player’s choice set, must be identical.
    • A player cannot distinguish between partial histories leading to nodes that belong to the same information set.
  • 21. What are the payoffs?
        • Payoffs capture the consequences of playing a game.
        • They represent the utility or net benefit to each player from a game ending at any given terminal node.
        • Payoffs show how resources are allocated to all the players contingent on a terminal node being reached.
  • 22. Lecture summary
    • We defined the four critical questions for analyzing any strategic situation.
    • We introduced the extensive form representation of a game to depict the answers to those critical questions.
    • We conducted several experiments in class to explore how players might resolve some strategic interactions.