game theory and competitor analysis paul c. godfrey mark h. hansen brigham young university
TRANSCRIPT
Game theory and competitor analysis
Paul C. Godfrey
Mark H. Hansen
Brigham Young University
Why should we care what competitors are doing?
• One firm’s changes always evoke responses by competitors – A feature of markets as systems
– Sometimes the response is to do nothing (rational or irrational)
• Game theory helps model rational behavior– Behavioral analysis helps model “irrational” behavior
– Fundamental knowledge of competitors helps understand likely responses
Game Theory
• Game theory attempts to mathematically capture behavior in strategic situations, in which an individual's success in making choices depends on the choices of others. Initially developed to analyze competitions in which one individual does better at another's expense (zero sum games), and expanded to where there are joint gains to cooperation (Wikipedia, accessed 12/08)
• Game theory has several key assumptions– The players are rational maximizers
– The players have full information about each other
– The payoffs are known
Game Theory
Simultaneous Games
Enter
Don’tEnter
Don’tEnterEnter
In-n-Out
Five Guys
200, 175
0, 300
325, 0
0, 0
Five Guys and In-n-Out aredeciding, at the same time,whether to enter the market
Is there a dominant strategy forFive Guys? In-n-Out?
Game Theory
Sequential Games
In-n-Out
Enter
Don’tEnter
0, 300
Five GuysFight
Accommodate
50, 150
150, 200
Five Guys is already in the market, In-n-Out is deciding whether to enter
The prisoners dilemma
• Two people are picked up by the police on suspicion of robbery and placed in separate cells. The evidence is sketchy and so the district attorney attempts to elicit a confession from each person separately. The district attorney presents each with the following payoff matrix, represented as years in jail.
• What will the accused persons do?
Player 2
Not Confess Confess
Player 1
Not Confess
1,1 5,0
Confess 0,5 3,3
The centipede game
There are two players, A & B, who alternate in making choices. That is, A makes the decision in round 1, B in round 2, and so on. In each round, the player must decide whether to end the game by moving down, or continue the game by moving across. Below each round is a payoff matrix, showing the points awarded to A & B if the game ends in that round. The objective of the game is for each player to maximize their own payoff.
The Centipede Game, Structure
Player A M P
Player B N Q
Decision Player
A B
1 2
The Centipede Game, 1
Player A 1 0
Player B 0 2
Decision Player
A B
1 2
The Centipede Game, 2
Player A 1 0 4 3
Player B 0 2 1 100
Decision Player
A B A B
1 2 3 4
The Centipede Game, 3
Player A 1 0 4 3 102 101
Player B 0 2 1 100 99 102
Decision Player
A B A B A B
1 2 3 4 5 6
The Ultimatum Game
• You are given $5. The condition for keeping the money is that you have to propose a split between you and the other player and the other player has to agree to your split. If he or she agrees, you split the money. If he or she refuses, neither of you get the money.
• What split will you propose?
So, what do these games teach us about competitive behavior?
Questions to Ask About Competitors
Future goals
At all levels of management
Assumptions
Held about themselves and industry
Current Strategy
How do they currently compete?
Capabilities
Where are they strong? Weak?