Game Theory Game 3 Your Value to a Game

You:  Director of a commercial-free music video channel  Cable companies pay to carry you  You make a take-it-or-leave it offer Cable Companies:  Each channel has $100K in value  Cable companies have varying capacities (k)  Select the k best (lowest) offers  Market 1: 50, Market 2: 30, Market 3: 20 2

Your Value to a Game Your added value = the size of the pie when you are in the game minus the size of the pie when you are not 3

Unlimited Capacity (k=50) Unlimited Capacity What is your value to the game? What is the total value of the game? How much should you be paid to play? 4

Class Results Most requested 100  Or 99, or 99.9, or But…some LOVE the cable company  A few requested less than 50  One requested 10 5

Slightly Limited Capacity (k=30) Perception of Bargaining Power What is your value to the game? What is your perceived value? What is the total value of the game? How much should you be paid to play? 6

Limited Capacity (k=20) Perception of Bargaining Power What is your value to the game? What is the total value of the game? How much should you be paid to play? 7

k = x 30 = 1530 (+236%) k = 50 Average offer:88 Accept offers below:100 Average accepted offer:88 My profit per channel:12 My profit: x 38 = 456 k = x 20 = 1640 ( +260%) Payoff Summary 8

Intuition By reducing capacity  I lower your added value  I gain bargaining power  I get a better price per channel  I gain higher profits overall But:  The value of the game is smaller 9

Best Score maximum profit = = 195 Nicholas = 185 Cathleen =

Others Swinging for the fences  Zack = 100 Playing it safe  Rachel = 125 Playing it very safe  Hamit = 44 11