Simple Business Games. How much to Produce Dominant Strategy Nash Equilibrium.

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Presentation transcript:

Simple Business Games

How much to Produce Dominant Strategy Nash Equilibrium

Do all Games Have Dominant Strategies? Automotive Firm 1 has great engineering skills. Firm 2 has good designers and does great styling.

Do all Games Have Dominant Strategies? Firm 1 has a dominant strategy: technical change.

Do all Games Have Dominant Strategies? Firm 2 does not have a dominant strategy.

Do all Games Have Dominant Strategies? Firm 2’s choice is still obvious: assume #1 acts rationally. Adopt a technical change.

Do all Games Have Dominant Strategies? The lesson: assume your opponent will act rationally.

Early and Late Entry The new firm has a dominant strategy

Early and Late Entry The existing firm does not have a dominant strategy but it can rely on the new firm’s strategy

Early and Late Entry Moral of the story. Let the new guys try the gutsy strategies. Stodgy pays.

Multiple Nash Equilibria This is the styling problem with a new payoff matrix.

Multiple Nash Equilibria Now there are two Nash Equilibria

Early and Late Entry New entrant can enter either new or wait. Established Firm can extend early or late.

Multiple Nash Equilibria Look at the first Nash Equilibrium. Neither firm has reason to change

Multiple Nash Equilibria Ditto for the second equilibrium

Multiple Nash Equilibria This is an introduction. It shows how to get going. There is more to come.

End ©2003 Charles W. Upton