1 The High-Definition TV Game (DN, p. 121) 4,32,4 1,13,2 Low High U.S. effort Japanese Effort Payoffs to: U.S., Japan HighLow

2 If the U.S. Moves First Payoffs to: (U.S., Japan)

3 If Japan Moves First Dixit and Nalebuff, p. 122.

4 The Disadvantage of Flexibility Not in Dixit and Nalebuff.

5 A Clever Aphorism: “Any carpenter can turn a tree into a table, but a strategist can turn a table into a tree.”

6 Threats and Warnings THREAT: A response rule that punishes others who fail to act as I wish them to. (I will fire you if you are a minute late for work.) WARNING: A statement telling others what bad things it will be in my self-interest to do to them if they fail to act as I wish them to. (I will fire you if you become an alcoholic and can't perform like you used to.) PROMISE: A response rule that rewards others who act as I wish them to. (I will give you a ten dollar tip if you provide good service in this restaurant.) ASSURANCE: A statement telling others what good things it will be in my self-interest to do for them if they act as I wish them to. (I like initiative, and will promote you even if your innovative idea turns out to be a failure.) This classification is from Dixit and Nalebuff, p. 126.

7 Cournot Competition How Apex reacts Putting them together How Brydox reacts Apex is a monopoly if Q b = 0 Brydox is a monopoly if Q a = 0 If Q b = 120, Apex lets Brydox take the market If Q a = 120, Brydox lets Apex take the market

8 Stackelberg Competition The Stackelberg equilibrium is the point on Brydox’s reaction curve that Apex likes best. Apex moves first, choosing output of 60, and Brydox responds with output of 30.

9 Bertrand Competition (see p. 76 of Dixit and Nalebuff)