Putting Yourself in your Rivals Shoes What should player 2 do? 2 has no dominant strategy! But 2 should reason that I will play a Therefore 2 should choose C Player 2 Strategy A B C a 12.11 11.12 14.13 1.10 10 12,12 C 10.15 10.13 13.14 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Putting Yourself in your Rival’s Shoes • What should player 2 do? 2 has no dominant strategy! But 2 should reason that 1 will play “a”. Therefore 2 should choose “C”. Strategy A B C a b c Player 2 Player 1 12,11 11,12 14,13 11,10 10,11 12,12 10,15 10,13 13,14
The outcome aver 2 Strateg A B C 12.11 11.12 14.13 1101011 12. 10.15 10.13 13.14 This outcome is called a nash equilibrium ■“ a is player 1s best response to“C s player 2 s best response toa Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 The Outcome • This outcome is called a Nash equilibrium: “a” is player 1’s best response to “C”. “C” is player 2’s best response to “a”. Strategy A B C a b c Player 2 Player 1 12,11 11,12 14,13 11,10 10,11 12,12 10,15 10,13 13,14
Key Insights Look for dominant strategies Put yourself in your rivals shoes Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Key Insights • Look for dominant strategies • Put yourself in your rival’s shoes
A Market share game Two managers want to maximize market Share Strategies are pricing decisions Simultaneous moves One-shot game Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 A Market Share Game • Two managers want to maximize market share • Strategies are pricing decisions • Simultaneous moves • One-shot game
The market-Share game in normal form Manager 2 Strategy P=$10P=5P=$1 P=$10 5,,5 .2..8 1.9 P=:58,2 5,,5 2..8 P=$1 9..1 8,2 5,,5 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 The Market-Share Game in Normal Form Strategy P=$10 P=$5 P = $1 P=$10 .5, .5 .2, .8 .1, .9 P=$5 .8, .2 .5, .5 .2, .8 P=$1 .9, .1 .8, .2 .5, .5 Manager 2 Manager 1