s trategic t hinking imba managerial economics jack wu
TRANSCRIPT
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STRATEGIC THINKINGIMBA Managerial Economics
Jack Wu
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Nov. 16: Coca-Cola raised price 7% Nov. 22: Pepsi raised price 6.9% “Coke and Pepsi will move now
from price-based competition to marketing-based competition”,
Andrew Conway, Morgan Stanley
COKE VS. PEPSI, 1999
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COMPETITIVE DILEMMA
Pepsi
Raise price Discount
Raise price
C: 3, P: 3
C: 0, P: 5
Coke Discount C: 5,
P: 0 C: 1, P: 1
What should Coke do?
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STRATEGIC SITUATIONS
parties actively consider the interactions with one another in making decisions
game theory -- set of ideas and principles to guide strategic thinking simultaneous actions: strategic form sequential actions: extensive form
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DOMINATED STRATEGY
generates worse consequences than another strategy, regardless of the choices of the other parties
never use dominated strategy
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NASH EQUILIBRIUM
Given that the other players choose their Nash equilibrium strategies, each party prefers its own Nash equilibrium strategy
• No one is willing to deviate unilaterally from a Nash equilibrium
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SOLVING FOR NASH EQUILIBRIUM
eliminate dominated strategies, then check remaining cells
“arrow” technique
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COKE AND PEPSI GAME
Nash equilibrium: for both parties, “raise price” is dominated by “discount”.
but discounting is bad for both -- if only they could agree somehow to raise price.
Coke and Pepsi stuck in this situation for four years until November 1999.
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RADIO FORMATS
Merkur
Lite AC no change
Jupiter
Hot AC J: 60,
M: 40
J: 60,
M: 40
no change J: 70,
M: 30
J: 50,
M: 50
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RADIO FORMATS
For Merkur, “Lite AC” is dominated by “no change”; so consider only “no change”,
assuming Merkur chooses “no change”, Jupiter should choose “Hot AC”.
Repeat using “arrow technique”.
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OUT OF NASH EQUILIBRIUM
What if another player doesn’t play Nash equilibrium strategy? Nash equilibrium strategy may not be best still don’t use dominated strategy
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No Nash equilibrium in pure strategies
Competitor.com
NBA NHL
NBA W: 4, C: 3
W: 3, C: 4
We.com NHL W: 3,
C: 4 W: 4, C: 3
WHERE TO ADVERTISE?
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RANDOMIZED STRATEGIES
choose among pure strategies according to probabilities
must be unpredictable Example: retail market random discount Example: where to advertise _ We.com: ½ NBA and ½ NHL _ Competitor.com: ½ NBA and ½ NHL
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EVENING NEWS:
TVB
7:30pm 8:0pm
7:30pm A: 1, B: 1
A: 3, B: 4
ATV 8:0pm A: 4, B: 3
A: 2.5, B: 2.5
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COORDINATION AND COMPETITION Prime time for news is 8:0pm; second best is
7:30pm; since audience is limited, get maximum
viewership if two channels schedule at different times.
Question: which station gets 8:0pm? Situation has elements of
coordination -- avoiding same time slot competition -- getting the 8:0pm slot
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ZERO/POSITIVE SUM
zero-sum games: pure competition -- one party better off only if other is worse off
positive-sum games: coordination -- both can be better off or both worse off
co-opetition: competition and coordination
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ADOPTING DATABASE SOFTWARE
Sol
IBM Oracle
Venus
IBM V: 1.5,
S: 1.5
V: 1,
S: 1
Oracle V: 1,
S: 1
V: 1.5,
S: 1.5
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FOCAL POINT
Nash equilibrium multiple Nash equilibria
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SEQUENCING
Game in extensive form – sequence of moves:
nodesbranchesoutcomes
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EXTENSIVE FORM: EQUILIBRIUM
backward induction final nodes intermediate nodes initial node
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TVB
ATV
ATV
4, 3
2.5, 2.5
1, 1
3, 4
8:00
7:30
7:30
8:00
7:30
8:00
TVB, ATV
TV NEWS: SEQUENTIAL MOVES
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STRATEGIC MOVE
Action to influence beliefs or actions of other parties in a favorable way
• credibility– first mover advantage– second mover advantage
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EXAMPLES Examples: Evening TV news -- both stations want to move first: which one can?
Use strategic move, eg, contracts with advertisers to deliver news at 8pm.
Famous Chinese general: after crossing a river, burnt his ships -- strategic move to force soldiers to fight harder.
Issue: Is the move credible? Will it convince the other players?
Advantage doesn’t always go to first mover; In war, better to see opponent’s move, and then take action, eg is
enemy moving south or north? new product category -- let competitor test the market and
educate the customers
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consumer
Litho
LithoMake prints
Do not
Buy
Do not
Make more prints
Do not
(1) serial number (2) destroying the plate(3) other solution?
LITHOGRAPHER
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CONDITIONAL STRATEGIC MOVES
threats promises
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MORGAN STANLEY:“SHAREHOLDER RIGHTS PLAN”
If any party acquires 15% or more of company’s shares, other shareholders get right to buy additional shares at 50% discount.
Impact on hostile bidder?
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SHAREHOLDER RIGHTS PLAN This shareholder rights plan is a threat to
potential bidders: most hostile bidders begin with small stake; with shareholder rights plan, if bidder
acquires more than 15%, then rights triggered, and bidder will be diluted.
Nickname: poison pill. Actually works against shareholder rights --
by entrenching existing management.
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Sharon
Hilda
acquires 100,000shares
doesn’t bid
does not
activates rights
Hilda loses on initial stake + cost of takeover rises
POISON PILL
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Union
Employer
reject union demand
accept
do not
strike Lose current wageand possibly gain infuture wage
Maintain current wage
Why are strikes rare inAmerican professional football?
STRIKE