1. Game Theory III – Sequential Games
Managerial Economics
Kyle Anderson

2. Sequential Games
Does the outcome of a game change if one player chooses first?
Sequential games:
Multiple players
Perfect information
Sequential moves
The second player gets to observe the first player’s move prior to making a decision.
Kyle J. Anderson

3. Simultaneous move game
How would this game be different if one player moved first?
Hotel – decent quality
Hotel – low quality
Stay
5, 5
-10, 10
Don’t stay
0, -5
0, 0

4. Sequential move games Stay 5, 5 Don’t -5, 0 High Quality Stay 10, -10
Traveler
Don’t
-5, 0
High Quality
Stay
10, -10
Hotel
Traveler
Low Quality
0, 0
Don’t
Solve by Backward Induction – Last stage first
What outcome do we expect?
*Payoffs for Hotel are listed first

5. Sequential move games High Q 5, 5 Low Q -10, 10 Stay High Q 0, -5
Hotel
Low Q
-10, 10
Stay
High Q
0, -5
Traveler
Hotel
Don’t Stay
0, 0
Low Q
Solve by Backward Induction – Last stage first
What outcome do we expect?
*Payoffs for Hotel are listed first

6. Three stage military game
Fight
-5, -10
Defend 1 2
Attack
-1, 9
Retreat 1
Surrender
10, -5
Don’t
0, 10
What outcome do we expect?

7. Three stage military game
Fight
-5, -10
Defend 1 2
Attack
-1, 9
Retreat 1
Surrender
10, -5
Don’t
0, 10
What if player 1 says it will never retreat?
Credible Commitment – Visible and Irrevocable

8. Market Entry Game Enter -5, -5 Don’t 10, 0 Enter Enter 0, 10 Don’t
Firm 2
Don’t
10, 0
Enter
Enter
0, 10
Don’t
Firm 1
Firm 2
0, 0
Don’t
First mover advantage – whichever firm commits to open first will be the one to earn positive profits.

9. How do firms use strategic commitment?
Committing to enter a market:
Committing to land/building
Union contracts
Development spending
Committing to increase production:
Expand capacity

10. Big Finish Sequential Games can lead to different outcomes.
To solve a sequential game, look at the last decision(s) first.
Credible commitment can lead to higher payouts if they deter rivals.