Game Theory and Competitive Strategy

Game Theory and Competitive Strategy
Chapter 13 Game Theory and Competitive Strategy

Topics to be Discussed Gaming and Strategic Decisions
Dominant Strategies The Nash Equilibrium Revisited Repeated Games Chapter 13 2

Topics to be Discussed Sequential Games
Threats, Commitments, and Credibility Entry Deterrence Bargaining Strategy Auctions Chapter 13 3

Gaming and Strategic Decisions
Game is any situation in which players (the participants) make strategic decisions Ex: firms competing with each other by setting prices, group of consumers bidding against each other in an auction Strategic decisions result in payoffs to the players: outcomes that generate rewards or benefits Chapter 13

Game theory tries to determine optimal strategy for each player Strategy is a rule or plan of action for playing the game Optimal strategy for a player is one that maximizes the expected payoff We consider players who are rational – they think through their actions Chapter 13

“If I believe that my competitors are rational and act to maximize their own profits, how should I take their behavior into account when making my own profit-maximizing decisions?”(Text, p. 474) Chapter 13 4

Noncooperative vs. Cooperative Games
Players negotiate binding contracts that allow them to plan joint strategies Example: Buyer and seller negotiating the price of a good or service or a joint venture by two firms (i.e., Microsoft and Apple) Binding contracts are possible Chapter 13 6

Noncooperative Game Negotiation and enforcement of binding contracts between players is not possible Example: Two competing firms, assuming the other’s behavior, independently determine pricing and advertising strategy to gain market share Binding contracts are not possible Chapter 13 5

“The strategy design is based on understanding your opponent’s point of view, and (assuming your opponent is rational) deducing how he or she is likely to respond to your actions.” (Text, p. 475) Chapter 13 7

An Example: How to buy a dollar bill Auction a dollar bill Highest bidder receives the dollar in return for the amount bid Second highest bidder must pay the amount he or she bid but gets nothing in return How much would you bid for a dollar? Typically bid more for the dollar when faced with loss as second highest bidder Chapter 13 8

Acquiring a Company Scenario
Company A: The Acquirer Company T: The Target A will offer cash for all of T’s shares The value and viability of T depends on the outcome of a current oil exploration project Chapter 13 10

Acquiring a Company Project failure: T’s value = $0
Project success: T’s value = $100/share All outcomes in between equally likely T’s value will be 50% greater with A’s management Chapter 13 11

Acquiring a Company Scenario How much should A offer?
A must submit the proposal before the exploration outcome is known T will not choose to accept or reject until after the outcome is known only to T Company T will accept any offer that is greater than the per share value of the company under current management How much should A offer? Chapter 13 12

Dominant Strategies Dominant Strategy is one that is optimal no matter what an opponent does An Example A and B sell competing products They are deciding whether to undertake advertising campaigns Chapter 13 9

Payoff Matrix for Advertising Game
Firm B Don’t Advertise Advertise Advertise 10, 5 15, 0 10, 2 6, 8 Firm A Don’t Advertise Chapter 13 14

Observations A: regardless of B, advertising is the best B: regardless of A, advertising is best Firm A Advertise Don’t Firm B 10, 5 15, 0 10, 2 6, 8 Chapter 13 14

Observations Dominant strategy for A and B is to advertise Do not worry about the other player Equilibrium in dominant strategy Firm A Advertise Don’t Firm B 10, 5 15, 0 10, 2 6, 8 Chapter 13 14

Dominant Strategies Equilibrium in dominant strategies
Outcome of a game in which each firm is doing the best it can regardless of what its competitors are doing Optimal strategy is determined without worrying about the actions of other players However, not every game has a dominant strategy for each player Chapter 13

Dominant Strategies Game Without Dominant Strategy
The optimal decision of a player without a dominant strategy will depend on what the other player does Revising the payoff matrix, we can see a situation where no dominant strategy exists Chapter 13 16

Modified Advertising Game
Firm B Don’t Advertise Advertise Advertise 10, 5 15, 0 20, 2 6, 8 Firm A Don’t Advertise Chapter 13 18

Modified Advertising Game
10, 5 15, 0 20, 2 6, 8 Firm A Advertise Don’t Firm B Observations A: No dominant strategy; depends on B’s actions B: Dominant strategy is to advertise Firm A determines B’s dominant strategy and makes its decision accordingly Chapter 13 18

The Nash Equilibrium Revisited
A dominant strategy is stable, but in many games one or more party does not have a dominant strategy A more general equilibrium concept is the Nash Equilibrium introduced in Chapter 12 A set of strategies (or actions) such that each player is doing the best it can given the actions of its opponents Chapter 13

None of the players have incentive to deviate from its Nash strategy, therefore it is stable In the Cournot model, each firm sets its own price assuming the other firm’s outputs are fixed. Cournot equilibrium is a Nash Equilibrium. Chapter 13 21

Dominant Strategy “I’m doing the best I can no matter what you do. You’re doing the best you can no matter what I do.” Nash Equilibrium “I’m doing the best I can given what you are doing. You’re doing the best you can given what I am doing.” Dominant strategy is a special case of Nash equilibrium Chapter 13

Two cereal companies face a market in which two new types of cereal can be successfully introduced, provided each type is introduced by only one firm Product Choice Problem Market for one producer of crispy cereal Market for one producer of sweet cereal Each firm only has the resources to introduce one cereal Noncooperative Chapter 13 22

Product Choice Problem
Firm 2 Crispy Sweet Crispy -5, -5 10, 10 Firm 1 Sweet Chapter 13 24

Product Choice Problem
Firm 1 Crispy Sweet Firm 2 -5, -5 10, 10 If Firm 1 hears Firm 2 is introducing a new sweet cereal, its best action is to make crispy Bottom left corner is Nash equilibrium What is other Nash Equilibrium? Chapter 13 24

Beach Location Game Scenario
Two competitors, Y and C, selling soft drinks Beach is 200 yards long Sunbathers are spread evenly along the beach Price Y = Price C Customer will buy from the closest vendor Chapter 13 26

Beach Location Game Ocean B Beach A 200 yards C Where will the competitors locate (i.e., where is the Nash equilibrium)? Will want to all locate in center of beach Similar to groups of gas stations, car dealerships, etc. Chapter 13 27

Maximin Strategies - Scenario Two firms compete selling file encryption software They both use the same encryption standard (files encrypted by one software can be read by the other - advantage to consumers) Firm 1 has a much larger market share than Firm 2 Both are considering investing in a new encryption standard Chapter 13 21

Maximin Strategy 0, 0 -10, 10 20, 10 -100, 0 Firm 2 Firm 1
Don’t invest Invest Don’t invest 0, 0 -10, 10 20, 10 -100, 0 Firm 1 Invest Chapter 13 29

Maximin Strategy Observations Dominant strategy Firm 2: Invest
Firm 1 should expect Firm 2 to invest Nash equilibrium Firm 1: invest Firm 2: Invest This assumes Firm 2 understands the game and is rational Firm 1 Don’t invest Invest Firm 2 0, 0 -10, 10 20, 10 -100, 0 Chapter 13 29

Maximin Strategy Observations
If Firm 2 does not invest, Firm 1 incurs significant losses Firm 1 might play don’t invest Minimize losses to 10 – maximin strategy Firm 1 Don’t invest Invest Firm 2 0, 0 -10, 10 20, 10 -100, 0 Chapter 13 29

Maximin Strategy If both are rational and informed
Both firms invest Nash equilibrium If Player 2 is not rational or completely informed Firm 1’s maximin strategy is to not invest Firm 2’s maximin strategy is to invest If 1 knows 2 is using a maximin strategy, 1 would invest Chapter 13 30

Maximin Strategy If Firm 1 is unsure about what Firm 2 will do, it can assign probabilities to each possible action Could use a strategy that maximizes its expected payoff Firm 1’s strategy depends critically on its assessment of probabilities for Firm 2 Chapter 13

Prisoners’ Dilemma -5, -5 -1, -10 -2, -2 -10, -1 Prisoner B Prisoner A
Confess Don’t Confess Confess -5, -5 -1, -10 -2, -2 -10, -1 Prisoner A Don’t Confess Chapter 13 33

Prisoners’ Dilemma What is the: -5, -5 -1, -10 -2, -2 -10, -1
Dominant strategy Nash equilibrium Maximin solution Dominant strategies are also maximin strategies Both confess is both Nash equilibrium and maximin solution Prisoner A Confess Don’t Confess Don’t Prisoner B -5, -5 -1, -10 -2, -2 -10, -1 Chapter 13 33

Mixed Strategy Pure Strategy Mixed Strategy
Player makes a specific choice or takes a specific action Mixed Strategy Player makes a random choice among two or more possible actions, based on a set of chosen probabilities Chapter 13 37

Matching Pennies 1, -1 -1, 1 Player B Heads Tails Heads Player A Tails
Chapter 13 36

Matching Pennies Pure strategy: No Nash equilibrium
No combination of head and tails leaves both players better off Mixed strategy: Random choice is a Nash equilibrium Player A Heads Tails Player B 1, -1 -1, 1 Chapter 13 36

Matching Pennies Player A might flip coin playing heads with ½ probability and tails with ½ probability If both players follow this strategy, there is a Nash equilibrium – both players will be doing the best they can given what their opponent is doing Although the outcome is random, the expected payoff is 0 for each player Chapter 13

Mixed Strategy One reason to consider mixed strategies is when there is a game that does not have any Nash equilibriums in pure strategy When allowing for mixed strategies, every game has a Nash equilibrium Mixed strategies are popular for games like poker A firm might not find it reasonable Chapter 13

The Battle of the Sexes 2,1 0,0 1,2 Joan Jim Wrestling Opera Wrestling
Chapter 13 33

The Battle of the Sexes Pure Strategy Mixed Strategy
Both watch wrestling Both watch opera Mixed Strategy Jim chooses wrestling Joan chooses wrestling Jim Wrestling Opera Joan 2,1 0,0 1,2 Chapter 13 33

Repeated Games Game in which actions are taken and payoffs are received over and over again Oligopolistic firms play a repeated game With each repetition of the Prisoners’ Dilemma, firms can develop reputations about their behavior and study the behavior of their competitors Chapter 13 39

Pricing Problem 10, 10 100, -50 50, 50 -50, 100 Firm 2 Firm 1
Low Price High Price Low Price 10, 10 100, -50 50, 50 -50, 100 Firm 1 High Price Chapter 13 41

Pricing Problem How does a firm find a strategy that would work best on average against all or almost all other strategies? Tit-for-tat strategy Repeated game strategy in which a player responds in kind to an opponent’s previous play, cooperating with cooperative opponents and retaliating against uncooperative ones Chapter 13

Tit-for-Tat Strategy What if the game is infinitely repeated?
Competitors repeatedly set price every month, forever Tit-for-tat strategy is rational If competitor charges low price and undercuts firm Will get high profits that month but know I will lower price next month Both of us will get lower profits if keep undercutting, so not rational to undercut Chapter 13 41

Tit-for-Tat Strategy What if repeated a finite number of times?
If both firms are rational, they will charge high prices until the last month After the last month, there is no retaliation possible But in the month before last month, knowing that will charge low price in last month, will charge low price in month before Keep going and see that only rational outcome is for both firms to charge low price every month Chapter 13 44

Tit-for-Tat Strategy If firms don’t believe their competitors are rational or think perhaps they aren’t, cooperative behavior is a good strategy Most managers don’t know how long they will be competing with their rivals In a repeated game, prisoner’s dilemma can have cooperative outcome Chapter 13 44

Repeated Games Conclusion
Cooperation is difficult at best since these factors may change in the long run Need a small number of firms Need stable demand and cost conditions This could lead to price wars if don’t have them Chapter 13 45

Oligopolistic Cooperation in the Water Meter Industry
Characteristics of the Market Four producers of water meters Rockwell International Badger Meter Neptune Water Meter Company Hersey Products Rockwell has about 35% of market share Badger, Neptune, and Hersey combined have about a 50 to 55% share Chapter 13 46

Most buyers are municipal water utilities Very inelastic demand Not a significant part of the budget for providing water Demand is stable Demand grows steadily with population Utilities have long-standing relationships with suppliers Reluctant to switch Chapter 13 46

Significant economies of scale Both long term relationship and economies of scale represent barriers to entry Hard for new firms to enter market If firms were to cooperate, could earn significant monopoly profits If compete aggressively to gain market share, profits will fall to competitive levels Chapter 13 47

This is a Prisoners’ Dilemma – what should the firms do? Lower price to a competitive level Cooperate Companies have been playing repeated game for decades Cooperation has prevailed given market characteristics Chapter 13 48

Sequential Games Players move in turn, responding to each other’s actions and reactions Ex: Stackelberg model (ch. 12) Responding to a competitor’s ad campaign Entry decisions Responding to regulatory policy Chapter 13 49

Sequential Games Going back to the product choice problem
Two new (sweet, crispy) cereals Successful only if each firm produces one cereal Sweet will sell better Both still profitable with only one producer Chapter 13 51

Modified Product Choice Problem
If firms both announce their decisions independently and simultaneously, they will both pick sweet cereal and both will lose money What if Firm 1 sped up production and introduced new cereal first? Now there is a sequential game Firm 1 will think about what Firm 2 will do Chapter 13

Modified Product Choice Problem
Firm 2 Crispy Sweet Crispy -5, -5 10, 20 20, 10 Firm 1 Sweet Chapter 13 53

Extensive Form of a Game
Representation of possible moves in a game in the form of a decision tree Allows one to work backward from the best outcome for Firm 1 Chapter 13 56

Product Choice Game in Extensive Form
Crispy Sweet -5, -5 10, 20 20, 10 Firm 1 Crispy Sweet Firm 2 Chapter 13 61

Sequential Games The Advantage of Moving First
In this product-choice game, there is a clear advantage to moving first The first firm can choose a large level of output, thereby forcing second firm to choose a small level Can show the firm’s mover advantage by revising the Stackelberg model and comparing to Cournot Chapter 13 62

First Mover Advantage Assume: Duopoly Chapter 13 63

First Mover Advantage Duopoly Chapter 13 64

Choosing Output Firm 2 7.5 10 15 7.5 Firm 1 10 15 112.50, 112.50
56.25, 0, 0 112.50, 56.25 125, 93.75 50, 75 93.75, 125 75, 50 100, 100 Firm 1 10 15 Chapter 13 66

Choosing Output This payoff matrix illustrates various outcomes
Move together, both produce 10 If Firm 1 moves first (Q=15), best Firm 2 can do is 7.5 Firm 1 7.5 Firm 2 112.50, 56.25, 0, 0 112.50, 56.25 125, 93.75 50, 75 93.75, 125 75, 50 100, 100 10 15 Chapter 13 66

Threats, Commitments, and Credibility
Strategic Moves What actions can a firm take to gain advantage in the marketplace? Deter entry Induce competitors to reduce output, leave, raise price Implicit agreements that benefit one firm Chapter 13 68

Strategic Move Action that gives a player an advantage by constraining his behavior Firm 1 must constrain his behavior to the extent Firm 2 is convinced that he is committed Chapter 13 69

How to Make the First Move Demonstrate Commitment Firm 1 must do more than announce they will produce sweet cereal Invest in expensive advertising campaign Buy large order of sugar and send invoice to Firm 2 Commitment must be enough to induce Firm 2 to make the decision Firm 1 wants it to make Chapter 13

Empty Threats If a firm will be worse off if it charges a low price, the threat of a low price is not credible in the eyes of the competitors When firms know the payoffs of each other’s actions, firms cannot make threats the other firm knows they will not follow In our example, Firm 1 will always charge high price and Firm 2 knows it Chapter 13 70

Pricing of Computers and Word Processors
Firm 2 High Price Low Price High Price 100, 80 80, 100 10, 20 20, 0 Firm 1 Low Price Chapter 13 72

Sometimes firms can make credible threats Scenario Race Car Motors, Inc. (RCM) produces cars Far Out Engines (FOE) produces specialty car engines and sells most of them to RCM Sequential game with RCM as the leader FOE has no power to threaten to build big engines since RCM controls output Chapter 13 76

Production Choice Problem
Race Car Motors Small cars Big cars Small engines 3, 6 3, 0 8, 3 1, 1 Far Out Engines Big engines Chapter 13 75

RCM does best by producing small cars Knows that Far Out will then produce small engines Far Out prefers to make big engines Can Far Out induce Race Car to produce big cars instead? Chapter 13 77

Suppose Far Out threatens to produce big engines no matter what RCM does? Not credible since once RCM announces they are producing small cars, FOE will not have incentive to carry out threat Can make threat credible by altering pay off matrix by constraining its own choices Shutting down or destroying some small engine production capacity Chapter 13

Modified Production Choice Problem
Race Car Motors Small cars Big cars Small engines 0, 6 0, 0 8, 3 1, 1 Far Out Engines Big engines Chapter 13 79

Modified Production Choice Problem
Strategic commitments can be effective but not without risk Rely heavily on accurate knowledge of payoff matrix and industry May have competitors out there that they don’t know about and lose sales Chapter 13 80

Role of Reputation If Far Out gets the reputation of being irrational
They threaten to produce large engines no matter what Race Car does Threat might be credible because irrational people don’t always make profit maximizing decisions A party thought to be crazy can lead to a significant advantage Chapter 13

Bargaining Strategy Bargaining situation can depend on ability to affect relative bargaining position Consider two firms introducing one of two complementary goods: Firm 1 has cost advantage in Good A Firm 2 has cost advantage in Good B Chapter 13 104

Bargaining Strategy 40, 5 50, 50 5, 45 60, 40 Firm 2 Firm 1 Produce A
Produce B 40, 5 50, 50 5, 45 60, 40 Produce A Firm 1 Produce B Chapter 13 106

Bargaining Strategy With collusion: Without collusion: 40, 5 50, 50
Firm 1 Produces A and Firm 2 produces B (50,50) Without collusion: Firm 1 produces A and Firm 2 produces B (50,50) Nash equilibrium Firm 1 Produce A Produce B Firm 2 40, 5 50, 50 5, 45 60, 40 Chapter 13 106

Bargaining Strategy Suppose each firm is also bargaining on the decision to join in a research consortium with a third firm Dominant strategy is for both firms to enter consortium Chapter 13 108

Bargaining Strategy 10, 10 10, 20 40, 40 20, 10 Firm 2 Firm 1
Work alone Enter consortium 10, 10 10, 20 40, 40 20, 10 Work alone Firm 1 Enter consortium Chapter 13 110

Bargaining Strategy Linking the Bargaining Problem
Firm 1 announces it will join the consortium only if Firm 2 agrees to produce A and Firm 1 will produce B Firm 2’s best interest is to produce A with Firm 1 producing B Firm 1’s profit increases from 50 to 60 Chapter 13 108

Bargaining Strategy Strategic moves can be used in bargaining
Combining issues in bargaining can benefit one side at other’s expense Chapter 13 112

Wal-Mart Stores’ Preemptive Investment Strategy
How did Wal-Mart become the largest retailer in the U.S. when many established retail chains were closing their doors? Gained monopoly power by opening in small towns with no threat of other discount competition Preemptive game with Nash equilibrium Chapter 13 81

The Discount Store Preemption Game
Company X Enter Don’t enter Enter -10, -10 20, 0 0, 0 0, 20 Wal-Mart Don’t enter Chapter 13 83

The Discount Store Preemption Game
Two Nash equilibrium Low left Upper right Must be preemptive to win Wal-Mart Enter Don’t enter Company X -10, -10 20, 0 0, 0 0, 20 Chapter 13 83

Entry Deterrence Barriers to entry important for monopoly power
Economies of scale, patents and licenses, access to critical inputs Firms can also deter entry To deter entry, the incumbent firm must convince any potential competitor that entry will be unprofitable Chapter 13 84

Potential Entrant (X) ($80 fixed costs)
Entry Possibilities Potential Entrant (X) ($80 fixed costs) Enter Stay out High price (accommodation) 100, 20 200, 0 130, 0 70, -10 Incumbent (I) Low Price (warfare) Chapter 13 86

Entry Deterrence Scenario
If X does not enter, I makes a profit of $200 million If X enters and charges a high price, I earns a profit of $100 million and X earns $20 million If X enters and charges a low price, I earns a profit of $70 million and X earns $-10 million Chapter 13 88

Entry Deterrence Could threaten X with warfare if enters market
Not credible because once X has entered, it is in your best interest to accommodate and maintain high price Chapter 13 89

Entry Deterrence What if firm I makes an investment before entry to increase capacity? Irrevocable commitment Gives new payoff matrix since profits will be reduced by investment Threat is completely credible Rational for Firm X to stay out of market Chapter 13 92

Entry Deterrence 50, 20 150, 0 130, 0 70, -10 Potential Entrant (X)
Enter Stay out High price (accommodation) 50, 20 150, 0 130, 0 70, -10 Incumbent (I) Low price (warfare) Chapter 13 91

Entry Deterrence If incumbent has reputation of price cutting competitors even at loss, then threat will be credible Short run losses may be offset by long run gains as monopolist Chapter 13

Entry Deterrence Production of commercial airlines exhibit significant economies of scale Airbus and Boeing considering new aircraft Suppose it is not economical for both firms to produce the new aircraft Chapter 13 93

Development of a New Aircraft
Airbus Produce Don’t produce -10, -10 100, 0 0, 0 0, 120 Produce Boeing Don’t produce Chapter 13 95

Boeing has head start Boeing will produce Airbus will not produce Boeing Produce Don’t produce Airbus -10, -10 100, 0 0, 0 0, 120 Chapter 13 95

Governments can change outcome of game European government agrees to subsidize Airbus before Boeing decides to produce With Airbus being subsidized, the payoff matrix for the two firms would differ significantly Chapter 13

Development of an Aircraft After European Subsidy
Airbus Produce Don’t produce -10, 10 100, 0 0, 0 0, 120 Produce Boeing Don’t produce Chapter 13 97

Development of an Aircraft After European Subsidy
Airbus will produce Boeing will not produce Airbus Produce Don’t produce Produce -10, 10 100, 0 0, 0 0, 120 Boeing Don’t produce Chapter 13 95

Diaper Wars Even though there are only two major firms, competition is intense The competition occurs mostly in the form of cost-reducing innovation Small cost savings can lead to capturing of market share Both firms spend significantly on R&D Chapter 13 98

Competing Through R & D 40, 20 80, -20 60, 40 -20, 60 Kimberly-Clark
No R&D 40, 20 80, -20 60, 40 -20, 60 R&D P&G No R&D Chapter 13 100

Competing Through R & D Both spend on R&D Why not cooperate?
Dominant strategy Why not cooperate? Strengthening Bargaining Power Credibility Reducing flexibility P&G R&D No R&D Kimberly-Clark 40, 20 80, -20 60, 40 -20, 60 Chapter 13 100

Auctions Markets in which products are bought and sold through formal bidding processes Encourages competition that increases seller’s revenue Low cost of transactions Useful for unique items or those with fluctuating value Tokyo fish market Chapter 13

Auction Formats Traditional English (oral)
Seller actively solicits progressively higher bids from a group of potential buyers Buyers are always aware of highest bid Stops when no one passes highest bid Chapter 13 112

Auction Formats Dutch auction
Seller begins by offering item at relatively high price, then reduces it by fixed amounts until item is sold First buyer accepting offered price can buy item at that price Chapter 13

Auction Formats Sealed-bid
All bids are made simultaneously in sealed envelopes, where winning bid is the one who submitted highest bid First price Sales price equals highest bid Second price Sales price equals second highest bid Chapter 13

Valuation and Information
How to choose an auction format Private-value auction – bidder knows individual valuations of object, but valuations differ from bidder to bidder Signed baseball Common-value auction: bidders uncertain what the value is Offshore oil reserve Chapter 13 112

Price-Value Auctions Each bidder must choose bidding strategy
Payoff for winning is reservation price minus price paid Payoff for losing is zero Chapter 13 112

Private Value Auction English oral auction and second–price sealed bid auctions Bidding truthfully is dominant strategy Pay based on value of second highest bidder so no incentive not to bid reservation price Risk to bidding higher than reservation price Chapter 13 112

Private Value Auctions
English auction Continue bidding until second person is unwilling to make bid Sealed-bid auction Winning bid approximately equal to the second highest bidder’s reservation price Both yield the same revenue Chapter 13 112

Common Value Auctions Winner’s Curse
The winner is worse off because they overestimated the value of the item and thereby overbid Must reduce bid by amount equal to the expected error of the winning bidder If a lot of variation in other bidders, then estimates are fairly imprecise Chapter 13 112

Maximizing Auction Revenue
Private Value Auction Encourages many bidders to increase expected bid of winner Common Value Auction Uses open rather than sealed bid Generates greater revenue Reveals information about true value, reducing concern of winner’s curse Chapter 13 112

Maximizing Auction Revenue
Private value auction Sets min bid equal to or higher than value to you of keeping good for future sale Protects against loss if bidders are unaware of value Increases size of bids by letting bidders think item is valuable No sale could make bidders think item is low quality Chapter 13 112

Bidding and Collusion Buyers can allow benefit from collusion
Can be done legally through buying groups Can be done illegally through collusive agreements that violate antitrust laws Collusion is not easy because of large incentive to cheat Repeated auctions allow for penalizing participants that break agreement Chapter 13 112

Bidding and Collusion Examples
Collusion among baseball owners to limit their bidding for free agent players in the 1980’s Two of the world’s most successful auction houses were found guilty of agreeing to fix prices of commissions Sotheby’s and Christie’s Chapter 13

Internet Auctions Popularity of auctions has skyrocketed with growth of internet Most popular site is eBay Dominates online person-person auction industry Subject to large network externalities Choose auction site with largest number of potential bidders Chapter 13 112

Internet Auctions eBay auctions are somewhat different from types discussed A few caveats: No quality control function Poor seller feedback Bid manipulation may occur Chapter 13

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