game theory for strategic advantage - mit opencourseware · 2020-03-09 · • in 1971, congress...
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Game Theory for
Strategic Advantage
15.025
Alessandro Bonatti MIT Sloan
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Foundations of Game Theory
Rationality
Bargaining
Dynamic Competition
Influencing Outcomes
Equilibrium
Backward Induction
Predicting Outcomes
Wars of Attrition
Prof. Alessandro Bonatti 2 MIT Sloan 15.025 Spring 2015
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Today’s Class: Game-Changers and Game Changers
• Changing the payoffs
• Changing the available moves
• Enabling retaliation
• Changing the order of moves
• Leaving some things to chance
Prof. Alessandro Bonatti 3 MIT Sloan 15.025 Spring 2015
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“Most game theorists aren’t very strategic: they solve the game as given, rather than change the game.” Richard Thaler, “Nudge”
http://www.youtube.com/watch?v=2jxq1B7NkhE
Prof. Alessandro Bonatti MIT Sloan 15.025 Spring 2015 4
(1) Categorization: what kind of game is this?
(2) Play: what should I do?
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Chapter 1: Prisoners’ Dilemmas
• The classic game (prisoners)
• Advertising games (e.g., cigarette companies)
• “Commons” games (fishing, water use, etc.)
• Pricing games in oligopolies
• “Rat races” in the workplace
Prof. Alessandro Bonatti MIT Sloan 15.025 Spring 2015 5
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William the Conqueror
10 , 5 -10 , 10
-10 , -10 -5 , 15
Soldiers
Go Home
Stay & Fight
Go Home Stay & Fight
Prof. Alessandro Bonatti 6 MIT Sloan 15.025 Spring 2015
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Burning the Boats (your opponent’s payoffs)
10, 5 -10, -200
-200, -10 -200, -200
Soldiers
Go Home
Stay & Fight
Go Home Stay & Fight
Prof. Alessandro Bonatti 7 MIT Sloan 15.025 Spring 2015
• All payoffs are now lower
• Bill has fewer viable actions
• Direct effect vs. strategic effect
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• “Burning the Boats” – any experience?
• Binding yourself vs. opponent vs. both
• Is it easy to commit?
• Credibility and irreversibility
• What if there’s no smoke?
Credible Commitments
Prof. Alessandro Bonatti MIT Sloan 15.025 Spring 2015 8
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Game without Price-Match
Prof. Alessandro Bonatti 9MIT Sloan 15.025 Spring 2015
Competitor
Prices Hi Lo
You Hi ( 6 , 6 ) ( 0 , 7 )
Lo ( 7 , 0 ) ( 3 , 3 )
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Game with Price-Match (by You only)
Prof. Alessandro Bonatti 10 MIT Sloan 15.025 Spring 2015
Competitor
Prices Hi Lo
You Hi ( 6 , 6 ) ( 3 , 3 )
Lo ( 7 , 0 ) ( 3 , 3 )
A Related Principle: Mutually-Assured Destruction
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Most-Favorite Nation (MFN) Clauses (payoffs across games)
• In 1971, Congress passed the Federal Election Campaign Act, requiring campaign spots to be given the lowest rate for TV ads.
• In 1990, it required Medicaid to pay no more than 88% of the average price for drugs (at a time when HMOs were getting great deals).
• A 2010 antitrust lawsuit against Blue Cross Blue Shield took aim at contract provisions that required hospitals to offer the company the lowest non-government rate for hospital services.
• Now Michigan (and 20 other states) have laws barring insurers from using MFN clauses.
Prof. Alessandro Bonatti 11 MIT Sloan 15.025 Spring 2015
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Apple, Amazon and MFN • In 2010, Amazon accounted for 80%-90% of all e-book sales. • Amazon was discounting titles below cost to lure customers to the
new format and promote its Kindle e-book reader. • Apple's let publishers set the prices themselves, under an "agency
model," but required the publishers to give iTunes store the best deal in the marketplace.
• Publishers could not keep low prices on Amazon without taking a hit. • Publishers approached Amazon and demanded that it switch to the
agency model, threatening to withhold e-books. • Amazon relented, and e-book prices jumped to $12.99 from $9.99. • July 2013: a federal judge ruled that “the MFN clause eliminated any
risk that Apple would ever have to compete on price for e-books.”
Prof. Alessandro Bonatti 12MIT Sloan 15.025 Spring 2015
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Chapter 2: Coordination Games
• Standard adoption
• Innovative technology adoption
• Investment
• Speculative attack
Prof. Alessandro Bonatti MIT Sloan 15.025 Spring 2015 13
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Pharma research is difficult…
Prof. Alessandro Bonatti MIT Sloan 15.025 Spring 2015 14
• “Most scientists at Merck will work an entire career and not develop a single drug.” -Ray Gilmartin (former Merck President & CEO)
• “You desperately need all teams (management, litigation, sales, R&D) to pull their weight.” -Joe Fuller (Founder, Monitor Consulting)
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Weakest Link: pairs
Prof. Alessandro Bonatti 15MIT Sloan 15.025 Spring 2015
• Teamwork!
• Choose your investment level from 1 to 3
• Unit cost of investment = 1
• Total benefit of investment
= 2*lowest investment in the team
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Weakest Link: pairs
Prof. Alessandro Bonatti 16MIT Sloan 15.025 Spring 2015
Effort levels Colleague
1 2 3
1 ( 1 , 1 ) ( 1 , 0 ) ( 1 , -1 )
You 2 ( 0 , 1 ) ( 2 , 2 ) ( 2 , 1 )
3 ( -1 , 1 ) ( 1 , 2 ) ( 3 , 3 )
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Weakest Link
• “I don’t play the game, I’m a banker at best:
I choose the people, I set the rules.” Kevin Sharer (former Amgen CEO)
• How would you change this game?
Prof. Alessandro Bonatti 17MIT Sloan 15.025 Spring 2015
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Recap: Game-Changers
• Introducing certainty – Credible commitments – Changing order of moves
• Changing the payoffs (e.g. investment)
• Introducing uncertainty
– Leaving some things to chance
Prof. Alessandro Bonatti 18MIT Sloan 15.025 Spring 2015
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Designing Games Frontiers of game theory
• Kids’ cake
• Pasta and lobster
• High-frequency trading
• Design auction rules FCC
• New York School choice
• Kidney Exchanges
Prof. Alessandro Bonatti 19MIT Sloan 15.025 Spring 2015
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Look Forward, Think Back
• Two-stage games: what happens in the 2nd stage?
• Evaluate ALL possible scenarios, ROLL BACK
• Build a “Larger Game” for stage 1
• Key principle: backward induction
Prof. Alessandro Bonatti 20 MIT Sloan 15.025 Spring 2015
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15.025 Game Theory for Strategic AdvantageSpring 2015
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