This document discusses game theory and competitive strategy. It covers game theory basics like types of games and Nash equilibrium. It also discusses prisoner's dilemma, infinitely and finitely repeated games, and applications like auctions. Finally, it discusses competitive strategy, including limit pricing, non-price competition, and optimal advertising levels. The key topics are how game theory helps with decision making accounting for others' actions and how firms use pricing and non-pricing strategies to gain competitive advantages.

1. Game theory
and strategy
competitive

2. Game theory
1.GAME THEORY BASICS
2.PRISONER'S DILEMMA
3.NASH EQUILIBRIUM
4.INFINITELY REPEATED GAMES
5.FINITELY REPEATED GAMES

3. ⮚ GAME THEORY BASICS
Game theory is a general framework to help decision-making when payoffs depend on
actions taken by others.
Types of Games
The theory of games, or game theory for short, is a method for the study of rational behavior
by individuals and firms involved with interactive decision problems. Game theory is applied
during situations in which decision-makers must take into account the reasoning of other
decisionmakers. It has been used to determine the formation of business and political
coalitions, the optimum price at which to sell products or services, the best site for a
manufacturing plant, and even the behavior of certain species in the struggle for biological
survival.
types of games :
1. Zero-Sum Game
One player's gain is another player's loss.
2. Positive-Sum Game
Game with the potential for mutual gain.
3. Negative-Sum Game
Game with the potential for mutual loss.
4. Cooperative Game
Game in which the strategies of the participants arc coordinated.

4. Role of Interdependence
The essence of a game is the interdependence of player
strategies. In a sequential game, each player moves in
succession, and each player is aware of all prior moves. The
general principle for players in a sequential game is to look
ahead and extrapolate back. In business decision-making, firms
make their best strategic decision based on the premise that
their initial decision will trigger a sequence of rational decision
responses from competitors. Sequential games that end after a
finite sequence of moves can be solved completely, at least in
principle.
In any strategic game, various strategies result in different
payoffs. Any given allocation of payoffs is called an outcome of
the game. A given allocation of payoffs is called an equilibrium
outcome if the payoff to no player can be improved by unilateral
action

5. Strategic Consideration
Firms often use threats and promises to alter the expectations
and actions of other firms. To succeed, threats and promises
must be credible. Game theory shows that it can be in a firm's
best interest to reduce its own freedom of future action. To
successfully implement game theory concepts, decision-makers
must understand the benefits to be obtained from concealing or
revealing useful information.

6. ⮚ PRISONER'S DILEMMA
The classic Prisoner's Dilemma game illustrates the
difficulty of making decisions under uncertainty, and
shows how interdependence among decision-makers
can breed conflict.
In Table 14.2, Coca-Cola can choose a given row
of profit outcomes by offering a discount price
('Up') or regular price ('Down'). Pepsi can choose a
given column of profit outcomes by choosing to
offer a discount price ('Left') or regular price
('Right'). Neither firm can choose a specific profit
outcome; the profit outcome received by each firm
depends upon the pricing strategies of both firms.
Business Application
e

7. ❖NASH EQUILIBRIUM
Nash Equilibrium Concept
Games result in stable outcomes if no player has an incentive to change their decision given the strategic
choices made by other players.
➔ In Table 14.2, each firm's secure strategy is
to offer a discount price regardless of the
other firm's actions. This outcome is called a
Nash equilibrium because, given the strategy
of its competitor, neither firm can improve its
own payoff by unilaterally changing its own
strategy.
➔ Nash equilibrium profits are clearly less than
if they colluded and both charged regular
prices.
➔ Randomized Strategies Haphazard actions to
keep rivals from being able to predict
strategic moves.
Nash Bargaining
A Nash bargaining game is another application of the simultaneous-move,
one-shot game. In Nash bargaining, two competitors or players 'bargain'
over some item of value. In a simultaneous-move, one-shot game, the
players have only one chance to reach an agreement.

8. Table 14.3 shows the nine possible outcomes
from such a profit-sharing bargaining game. If the
workers request $1 million, the only way that they
would get any money at all is if management
requests nothing. Similarly, if management
requests $1 million, the only way they get money
is if workers request nothing. If either party
requests nothing, Nash equilibrium solutions are
achieved when the other party requests the full $1
million. The ($1 million, $0) and ($0, $1 million)
solutions are both Nash equilibriums.

9. ❖INFINITELY REPEATED GAMES
Cooperation among competitors is possible if they interact on a
continuous basis in a repeated game.
.
➔ An infinitely repeated game is a competitive game that is repeated over and
over again without boundary or limit. In an infinitely repeated game, firms
receive repeatedowrand sequential payoffs that shape current and future
strategies.
➔ While it is important to recognize that the repeat nature of competitor
interactions can sometimes harm consumers, it is equally important to
recognize that repetitive interactions in the marketplace can also be helpful to
consumers.
Role of Reputation

10. ❖FINITELY REPEATED GAMES
Game that occurs only a limited number of times, or has limited duration
in time.
➔ A finitely repeated game takes place only a limited number of times, or has
limited duration. If there is uncertainty about when a game will end, the
conduct of a finitely repeated game mirrors an infinitely repeated game. To
see this is the case, it is necessary to introduce the concept of a trigger
strategy. A trigger strategy is a system of behavior that remains the same
until another player takes some course of action that precipitates a different
response.
Uncertain Final Period
End-of-Game Problem
➔ Difficulty tied to inability to punish or reward finalperiod behavior.
First-Mover Advantages
➔ Payoffs and game strategy are often shaped by the order in which various
players make their moves. Such games are called multistage games and
involve special considerations. A first-mover advantage is a benefit earned
by the player able to make the initial move in a sequential move or
multistage game. In a multistage game, the timing of player moves
becomes important.

11. ❖GAME THEORY AND AUCTION
STRATEGY
Auction Types
1.English Auction
2. Winner's Curse
3. Sealed-Bid Auction
4. Vickrey Auction
5. Dutch Auction

12. Competitive Strategy
Competitive advantage
Competitive strategy is defined as the long term plan of particular company in order
to gain competitive advantage over its competitors in industry.
An effective competitive strategy in imperfectly competitive markets is based upon
the firm's competitive advantage, a rare ability to create, distribute, or service
products valued by customers. For example, when compared with the USA and
Canada, Mexico enjoys a relative abundance of raw materials and cheap labor.
Mexico is in a relatively good position to export agricultural products, oil, and finished
goods that require unskilled labor to the US and Canadian market. The ultimate aim
of this strategy is to cope with or, better still, change those rules in the company's
favor. To do so, managers must understand and contend with rivalry among existing
competitors, entry of new rivals, threat of substitutes, bargaining power of suppliers,
and the bargaining power of buyers.

13. ❖PRICING STRATEGIES
➢.Limit Pricing
In imperfectly competitive markets, firms define
pricing strategies designed to reshape the
competitive environment to their advantage.
Limit pricing is defined as pricing by the incumbent
firms to deter the entry or expansion of fringe firms.
limit pricing is a pricing strategy designed as a
barrier to entry in order to protect a firm's monopoly
power & supernormal profit. If limit pricing is
successful, then a market is likely to remain highly
concentrated in the hands of one or a small number
dominant, businesses who can continue to earn
supernormal.

14. Figure 14.2 shows that the limit price PL is
lower than the monopoly price PM and
results in greater output, QL versus QM.
Notice that the entrant's residual demand
curve begins at PL because market demand
minus the amount sold by the incumbent
monopolist is zero at this point. In this case,
the potential entrant's residual demand curve
lies below the average cost curve at each
and every point. In this case, the potential
entrant's residual demand curve lies below
the average cost curve at each and every
point. Entry would bring economic losses
and is precluded by the incumbent
monopolist's limit pricing strategy.

15. NONPRICE COMPETITION
Firms compete for market share in a number of ways that do not
directly involve pricing strategies.
❖Advantages of Nonprice Competition
'Meet it or beat it' is a pricing challenge that often results in quick
competitor price reductions, and price wars always favor the
deep pockets of established incumbents. As a result, many
successful entrants find nonprice competition an effective means
for growing market share and profitability in the face of
entrenched rivals. Because rival firms are likely to retaliate
against price cuts, many smaller firms often emphasize nonprice
competition to boost demand. Nonprice competition takes a
variety of forms: affinity and frequent user programs, home
delivery systems, innovative use of technology, Internet
shopping, media advertising, price incentives to shop at off-peak
times, 24/7 shopping or service hours, and so on.

16. ❖Optimal Level of Advertising
Advertising include personal selling, improvements in product quality,
expansions in customer service,
research and development, and so on. The profit-maximizing amount of
nonprice competition is found by setting the marginal cost of the activity
involved equal to the marginal revenue or marginal benefit derived from it.
The marginal benefit derived from advertising is measured by the marginal
profit contribution generated. This is the difference between marginal
revenue, MR, and the marginal cost of production and distribution, MCq,
before advertising costs

17. The marginal cost of advertising expressed in terms of the
marginal cost of selling one additional unit of output can be
written as
In general, it will pay to expand advertising expenditures so long
as MRA>MCA. Because the marginal profit derived from
advertising is
the optimal level of advertising occurs at the point where
pay to reduce the level of advertising expenditures. The optimal
level of advertising is achieved when MRA = MCA, and = 0.