2. Quick recap on game theory and
matrices
• Game theory - Involves the studying of
alternative strategies that oligopolists may chose
to adopt depending on assumptions made about
competitor‘s behaviour.
• Dominant strategy - When a firm‘s best strategy
is independent of those chosen by the
competition.
• Nash‘s equilibrium – When each competitor‘s
chosen strategy maximises pay offs given other‘s
choices, so that no competitor has an incentive
to change their behaviour.
3. Car
A
Drive Stop
Car B
Crash safe
Drive Crash Arrives at
destination
early
Arrives at Late
destination early
Stop Safe Late
4. What are the 3G phone Licenses?
• Third generation of mobile
telecommunication technology.
• This is a set of standards used
for mobile devices and mobile
telecommunication services
and networks. Finds
application in wireless
voice telephony, mobile
Internet access, fixed
wireless Internet access, video
calls and mobile TV.
• Increase network capacity in
order to get more customers.
5. Spectrum auction
• Governments use auction systems to sell rights to transmit
signals over specific bands of the electromagnetic spectrum.
• Auction takes place in a series of rounds. The 3G licensing was
recorded to last 150 round of bidding.
• Thirteen firms started, four of which were the existing mobile
operators like Vodafone and Orange.
• Vodafone and B.T both had an overstretched network and
needed more capacity, thus a license was essential.
• Bids were submitted by fax, secretly (to prevent collusion),
though each participant was informed of all bids upon each
round end.
• Auction end when no more bids were received.
6.
7. Kenneth Binmore
• The game theorist who netted the British government £22
billion when he led the team that designed the third
generation (3G) telecommunications auction in 2000.
8. Simplified matrix for two participants
Vo
da
fon
e
High bid Low bid
Orange
License or will Loses license
bid next but bids for
High bid next license.
License or will round
Wins License
bid next
round
Wins License Loses License to
another firm
Low bid Loses
Loses license License to
but bids for another
next license firm
9. Another representation and with slight
rule change
Vodafone
id
High b bid Doesn’t bid
Low
Orange
High Low High Doesn’t Wins
Low bid
bid bid bid license with
bid
lower bid
10. Quiz
• Two firms are involved in developing a new technology that will allow consumers
to taste food over the Internet. This has potential, for example, in restaurant
promotion. Given the risks and the relatively small expected size of this market,
compatibility of the technologies is very important. Firm DigiTaste is far advanced
in developing its RemoteTaste technology. WebOdor has been expanding into the
Internet taste arena with its incompatible product, BitterWeb. The two companies
agree that if they both adopt the same technology, they each may gross $200M
from the developing industry. If they adopt different technologies, consumers will
make fun of both companies, and purchase neither product, leading to a gross of
$0. Retooling one's factory to make the competing (nonproprietary) technology
would cost WebOdor $100M and DigiTaste $250M. By the wave of an economist's
wand, their production decisions must be made simultaneously.
Set up the above scenario as a normal form (simultaneous) game.
What is the equilibrium outcome?
