S TRATEGIC T HINKING IMBA Managerial Economics Jack Wu.
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Transcript of S TRATEGIC T HINKING IMBA Managerial Economics Jack Wu.
STRATEGIC THINKINGIMBA Managerial Economics
Jack Wu
Nov. 16: Coca-Cola raised price 7% Nov. 22: Pepsi raised price 6.9% “Coke and Pepsi will move now
from price-based competition to marketing-based competition”,
Andrew Conway, Morgan Stanley
COKE VS. PEPSI, 1999
COMPETITIVE DILEMMA
Pepsi
Raise price Discount
Raise price
C: 3, P: 3
C: 0, P: 5
Coke Discount C: 5,
P: 0 C: 1, P: 1
What should Coke do?
STRATEGIC SITUATIONS
parties actively consider the interactions with one another in making decisions
game theory -- set of ideas and principles to guide strategic thinking simultaneous actions: strategic form sequential actions: extensive form
DOMINATED STRATEGY
generates worse consequences than another strategy, regardless of the choices of the other parties
never use dominated strategy
NASH EQUILIBRIUM
Given that the other players choose their Nash equilibrium strategies, each party prefers its own Nash equilibrium strategy
• No one is willing to deviate unilaterally from a Nash equilibrium
SOLVING FOR NASH EQUILIBRIUM
eliminate dominated strategies, then check remaining cells
“arrow” technique
COKE AND PEPSI GAME
Nash equilibrium: for both parties, “raise price” is dominated by “discount”.
but discounting is bad for both -- if only they could agree somehow to raise price.
Coke and Pepsi stuck in this situation for four years until November 1999.
RADIO FORMATS
Merkur
Lite AC no change
Jupiter
Hot AC J: 60,
M: 40
J: 60,
M: 40
no change J: 70,
M: 30
J: 50,
M: 50
RADIO FORMATS
For Merkur, “Lite AC” is dominated by “no change”; so consider only “no change”,
assuming Merkur chooses “no change”, Jupiter should choose “Hot AC”.
Repeat using “arrow technique”.
OUT OF NASH EQUILIBRIUM
What if another player doesn’t play Nash equilibrium strategy? Nash equilibrium strategy may not be best still don’t use dominated strategy
No Nash equilibrium in pure strategies
Competitor.com
NBA NHL
NBA W: 4, C: 3
W: 3, C: 4
We.com NHL W: 3,
C: 4 W: 4, C: 3
WHERE TO ADVERTISE?
RANDOMIZED STRATEGIES
choose among pure strategies according to probabilities
must be unpredictable Example: retail market random discount Example: where to advertise _ We.com: ½ NBA and ½ NHL _ Competitor.com: ½ NBA and ½ NHL
EVENING NEWS:
TVB
7:30pm 8:0pm
7:30pm A: 1, B: 1
A: 3, B: 4
ATV 8:0pm A: 4, B: 3
A: 2.5, B: 2.5
COORDINATION AND COMPETITION Prime time for news is 8:0pm; second best is
7:30pm; since audience is limited, get maximum
viewership if two channels schedule at different times.
Question: which station gets 8:0pm? Situation has elements of
coordination -- avoiding same time slot competition -- getting the 8:0pm slot
ZERO/POSITIVE SUM
zero-sum games: pure competition -- one party better off only if other is worse off
positive-sum games: coordination -- both can be better off or both worse off
co-opetition: competition and coordination
ADOPTING DATABASE SOFTWARE
Sol
IBM Oracle
Venus
IBM V: 1.5,
S: 1.5
V: 1,
S: 1
Oracle V: 1,
S: 1
V: 1.5,
S: 1.5
FOCAL POINT
Nash equilibrium multiple Nash equilibria
SEQUENCING
Game in extensive form – sequence of moves:
nodesbranchesoutcomes
EXTENSIVE FORM: EQUILIBRIUM
backward induction final nodes intermediate nodes initial node
TVB
ATV
ATV
4, 3
2.5, 2.5
1, 1
3, 4
8:00
7:30
7:30
8:00
7:30
8:00
TVB, ATV
TV NEWS: SEQUENTIAL MOVES
STRATEGIC MOVE
Action to influence beliefs or actions of other parties in a favorable way
• credibility– first mover advantage– second mover advantage
EXAMPLES Examples: Evening TV news -- both stations want to move first: which one can?
Use strategic move, eg, contracts with advertisers to deliver news at 8pm.
Famous Chinese general: after crossing a river, burnt his ships -- strategic move to force soldiers to fight harder.
Issue: Is the move credible? Will it convince the other players?
Advantage doesn’t always go to first mover; In war, better to see opponent’s move, and then take action, eg is
enemy moving south or north? new product category -- let competitor test the market and
educate the customers
consumer
Litho
LithoMake prints
Do not
Buy
Do not
Make more prints
Do not
(1) serial number (2) destroying the plate(3) other solution?
LITHOGRAPHER
CONDITIONAL STRATEGIC MOVES
threats promises
MORGAN STANLEY:“SHAREHOLDER RIGHTS PLAN”
If any party acquires 15% or more of company’s shares, other shareholders get right to buy additional shares at 50% discount.
Impact on hostile bidder?
SHAREHOLDER RIGHTS PLAN This shareholder rights plan is a threat to
potential bidders: most hostile bidders begin with small stake; with shareholder rights plan, if bidder
acquires more than 15%, then rights triggered, and bidder will be diluted.
Nickname: poison pill. Actually works against shareholder rights --
by entrenching existing management.
Sharon
Hilda
acquires 100,000shares
doesn’t bid
does not
activates rights
Hilda loses on initial stake + cost of takeover rises
POISON PILL
Union
Employer
reject union demand
accept
do not
strike Lose current wageand possibly gain infuture wage
Maintain current wage
Why are strikes rare inAmerican professional football?
STRIKE