Chapter 12

Strategy and
Game
Theory

2004 Thomson Learning/South-Western

Basic Concepts
Any

situation in which individuals must make

strategic choices and in which the final
outcome will depend on what each person
chooses to do can be viewed as a game.
Game theory models seek to portray complex
strategic situations in a highly simplified
setting.

Basic Concepts
All

games have three basic elements:

Players
Strategies
Payoffs

Players

can make binding agreements in

cooperative games, but can not in
noncooperative games, which are studied in
this chapter.

Players
A player

is a decision maker and can be

anything from individuals to entire nations.
Players have the ability to choose among a
set of possible actions.
Games are often characterized by the fixed
number of players.
Generally, the specific identity of a play is not
important to the game.
4

Strategies
A strategy

is a course of action available to a

player.
Strategies may be simple or complex.
In noncooperative games each player is
uncertain about what the other will do since
players can not reach agreements among
themselves.
5

Payoffs
Payoffs

are the final returns to the players at

the conclusion of the game.
Payoffs are usually measure in utility although
sometimes measure monetarily.
In general, players are able to rank the payoffs
from most preferred to least preferred.
Players seek the highest payoff available.
6

Equilibrium Concepts
In

the theory of markets an equilibrium

occurred when all parties to the market had no
incentive to change his or her behavior.
When strategies are chosen, an equilibrium
would also provide no incentives for the
players to alter their behavior further.
The most frequently used equilibrium concept
is a Nash equilibrium.
7

Nash Equilibrium
A Nash

equilibrium is a pair of strategies

(a*,b*) in a two-player game such that a* is an
optimal strategy for A against b* and b* is an
optimal strategy for B against A*.

Players can not benefit from knowing the equilibrium

strategy of their opponents.

Not

every game has a Nash equilibrium, and

some games may have several.

An Illustrative Advertising Game

Two

firms (A and B) must decide how much to

spend on advertising
Each firm may adopt either a higher (H) budget
or a low (L) budget.
The game is shown in extensive (tree) form in
Figure 12.1

An Illustrative Advertising Game

A makes

the first move by choosing either H or

L at the first decision node.
Next, B chooses either H or L, but the large
oval surrounding Bs two decision nodes
indicates that B does not know what choice A
made.

10

FIGURE 12.1: The Advertising Game

in Extensive Form
7,5
L
B
H

L
A
H

11

5,4

6,4

6,3

An Illustrative Advertising Game

The

numbers at the end of each branch,

measured in thousand or millions of dollars,
are the payoffs.

For example, if A chooses H and B chooses L,

profits will be 6 for firm A and 4 for firm B.

The

game in normal (tabular) form is shown in

Table 12.1 where As strategies are the rows
and Bs strategies are the columns.

12

Table 12.1: The Advertising Game

in Normal Form

Bs Strategies
As Strategies

13

L
7, 5
6, 4

L
H

H
5, 4
6, 3

Dominant Strategies and Nash

Equilibria
A dominant

strategy is optimal regardless of

the strategy adopted by an opponent.

As shown in Table 12.1 or Figure 12.1, the

dominant strategy for B is L since this yields a
larger payoff regardless of As choice.
If

A chooses H, Bs choice of L yields 5, one better than if

the choice of H was made.
If A chooses L, Bs choice of L yields 4 which is also one
better than the choice of H.

14

Dominant Strategies and Nash

Equilibria
A will

recognize that B has a dominant strategy

and choose the strategy which will yield the
highest payoff, given Bs choice of L.

A will also choose L since the payoff of 7 is one

better than the payoff from choosing H.

The

strategy choice will be (A: L, B: L) with

payoffs of 7 to A and 5 to B.

15

Dominant Strategies and Nash

Equilibria
Since

A knows B will play L, As best play is

also L.
If B knows A will play L, Bs best play is also L.
Thus, the (A: L, B: L) strategy is a Nash
equilibrium: it meets the symmetry required of
the Nash criterion.
No other strategy is a Nash equilibrium.
16

Two Simple Games

Table

12.2 (a) illustrates the childrens finger

game, Rock, Scissors, Paper.

17

The zero payoffs along the diagonal show that if

players adopt the same strategy, no payments are
made.
In other cases, the payoffs indicate a $1 payment
from the loser to winner under the usual hierarchy
(Rock breaks Scissors, Scissors cut Paper, Paper
covers Rock).

TABLE 12.2 (a): Rock, Scissors,

Paper--No Nash Equilibria

Bs Strategies
A Strategies

18

Rock
0, 0
-1, 1
1, -1

Rock
Scissors
Paper

Scissors
1, -1
0, 0
-1, 1

Paper
-1, 1
1, -1
0, 0

Two Simple Games

This

game has no equilibrium.

Any strategy pair is unstable since it offers at
least one of the players an incentive to adopt
another strategy.

19

For example, (A: Scissors, B: Scissors) provides

and incentive for either A or B to choose Rock.
Also, (A: Paper, B: Rock) encourages B to choose
Scissors.

Two Simple Games

Table

12.2 (b) shows a game where a husband

(A) and wife (B) have different preferences for
a vacation (A prefers mountains, B prefers the
seaside)
However, both players prefer a vacation
together (where both players receive positive
utility) than one spent apart (where neither
players receives positive utility).
20

TABLE 12.2 (b): Battle of the Sexes--Two

Nash Equilibria

Bs Strategies
As Strategies

21

Mountain
Seaside

Mountain
7, 5
6, 4

Seaside
5, 4
6, 3

Two Simple Games

At

the strategy (A: Mountain, B: Mountain),

neither player can gain by knowing the others
strategy.
The same is true with the strategy (A: Seaside,
B: Seaside).
Thus, this game has two Nash equilibria.

22

APPLICATION 12.1: Nash

Equilibrium on the Beach
Applications

of the Nash equilibrium concept

have been used to analyze where firms choose
to operate.
The concept can be used to analyze where
firms locate geographically.
The concept can also be used to analyze
where firms locate in the spectrum of specific
types of products.
23

APPLICATION 12.1: Nash

Equilibrium on the Beach
Hotellings

24

Beach

Hotelling looked at the pricing of ice cream sellers

along a linear beach.
If people are evenly spread over the length of the
beach, he showed that each seller had an
advantage selling to nearby consumers who incur
lower (walking) costs.
The Nash equilibrium concept can be used to show
the optimal location for each seller.

APPLICATION 12.1: Nash

Equilibrium on the Beach
Milk

25

Marketing in Japan

In southern Japan, four local marketing boards

regulate the sale of milk.
It appears that each must take into account what the
other boards are doing, since milk can be shipped
between regions.
A Nash equilibrium similar to the Cournot model
found prices about 30 percent above competitive
levels.

APPLICATION 12.1: Nash

Equilibrium on the Beach
Television

26

Scheduling

Firms can also choose where to locate along the

spectrum that represents consumers preferences
for characteristics of a product.
Firms must take into account what other firms are
doing, so game theory applies.
In television, viewers preferences are defined along
two dimensions--program content and broadcast
timing.

APPLICATION 12.1: Nash

Equilibrium on the Beach

In general, the Nash equilibrium tended to focus on

central locations
There

is much duplication of both program types and

schedule timing

This has left room for specialized cable channels

to attract viewers with special preferences for
content or viewing times.
Sometimes

the equilibria tend to be stable (soap operas

and sitcoms) and sometimes unstable (local news
programming).

27

The Prisoners Dilemma

The

Prisoners Dilemma is a game in which

the optimal outcome for the players is unstable.
The name comes from the following situation.

28

Two people are arrested for a crime.

The district attorney has little evidence but is
anxious to extract a confession.

The Prisoners Dilemma

29

The DA separates the suspects and tells each, If

you confess and your companion doesnt, I can
promise you a six-month sentence, whereas your
companion will get ten years. If you both confess,
you will each get a three year sentence.
Each suspect knows that if neither confess, they will
be tried for a lesser crime and will receive two-year
sentences.

The Prisoners Dilemma

The

normal form of the game is shown in Table

12.3.

30

The confess strategy dominates for both players so

it is a Nash equilibria.
However, an agreement not to confess would
reduce their prison terms by one year each.
This agreement would appear to be the rational
solution.

TABLE 12.3: The Prisoners Dilemma

B
A

Confess
A: 3 years
B: 3 years
A: 10 years
B: 6 months

Confess
Not confess

31

Not confess
A: 6 months
B: 10 years
A: 2 years
B: 2 years

The Prisoners Dilemma

The

rational solution is not stable, however,

since each player has an incentive to cheat.
Hence the dilemma:

32

Outcomes that appear to be optimal are not stable

and cheating will usually prevail.

Prisoners Dilemma Applications

Table

12.4 contains an illustration in the

advertising context.

The Nash equilibria (A: H, B: H) is unstable since

greater profits could be earned if they mutually
agreed to low advertising.
Similar situations include airlines giving bonus
mileage or farmers unwilling to restrict output.

The

inability of cartels to enforce agreements

can result in competitive like outcomes.

33

Table 12.4: An Advertising Game with a

Desirable Outcome That is Unstable

Bs Strategies
As Strategies

34

L
H

L
7, 7
10, 3

H
3, 10
5, 5

Cooperation and Repetition

In

the version of the advertising game shown in

Table 12.5, the adoption of strategy H by firm A
has disastrous consequences for B (-50 if L is
chosen, -25 if H is chosen).
Without communication, the Nash equilibrium
is (A: H, B: H) which results in profits of +15 for
A and +10 for B.

35

TABLE 12.5: A Threat Game in

Advertising

Bs Strategies
L
H

As Strategies

36

L
20, 5
10, -50

H
15, 10
5, -25

Cooperation and Repetition

However, A might

threaten to use strategy H

unless B plays L to increase profits by 5.
If a game is replayed many times, cooperative
behavior my be fostered.

Some market are thought to be characterized by

tacit collusion although firms never meet.

Repetition

37

of the threat game might provide A

with the opportunity to punish B for failing to
choose L.

Many-Period Games
Figure

12.2 repeats the advertising game

except that B knows which advertising
spending level A has chosen.

The oral around Bs nodes has been eliminated.

Bs

strategic choices now must be phrased in a

way that takes the added information into
account.

38

FIGURE 12.2: The Advertising Game

in Sequential Form
7,5
L

B
H
5,4

L
A

L
H

39

6,4

6,3

Many-Period Games
The

four strategies for B are shown in Table

12.6.

For example, the strategy (H, L) indicates that B

chooses L if A first chooses H.

The

explicit considerations of contingent

strategy choices enables the exploration of
equilibrium notions in dynamic games.

40

TABLE 12.6: Contingent Strategies in

the Advertising Game

Bs Strategies
As Strategies

41

L
H

L, L
7, 5
6, 4

L, H
7, 5
6, 3

H, L
5, 4
6, 4

H, H
5, 4
6, 3

Credible Threat
The

three Nash equilibria in the game shown in

Table 12.6 are:

(1) A: L, B: (L, L);

(2) A: L, B: (L, H); and
(3) A: H, B: (H,L).

Pairs

(2) and (3) are implausible, however,

because they incorporate a noncredible threat
that firm B would never carry out.

42

Credible Threat
Consider,

for example, A: L, B: (L, H) where B

promises to play H if A plays H.

This threat is not credible (empty threats) since, if A

has chosen H, B would receive profits of 3 if it
chooses H but profits of 4 if it chooses L.

By

eliminating strategies that involve

noncredible threats, A can conclude that, as
before, B would always play L.

43

Credible Threat
The

equilibrium A: L, B: (L, L) is the only one

that does not involve noncredible threats.
A perfect equilibrium is a Nash equilibrium in
which the strategy choices of each player avoid
noncredible threats.

44

That is, no strategy in such an equilibrium requires a

player to carry out an action that would not be in its
interest at the time.

Models of Pricing Behavior: The

Bertrand Equilibrium
Assume

two firms (A and B) each producing a

homogeneous good at constant marginal cost,
c.
The demand is such that all sales go to the firm
with the lowest price, and sales are evenly split
if PA = PB.
prices where profits are nonnegative, (P
c) are in each firms pricing strategy.

All

45

The Bertrand Equilibrium

The

To

Even with only two firms, the Nash equilibrium is

the competitive equilibrium where price equals
marginal cost.

see why, suppose A chooses PA > c.

B can choose PB < PA and capture the market.

But, A would have an incentive to set PA < PB.

This

46

only Nash equilibrium is PA = PB = c.

would only stop when PA = PB = c.

Two-Stage Price Games and

Cournot Equilibrium
If

firms do not have equal costs or they do not

produce goods that are perfect substitutes, the
competitive equilibrium is not obtained.
Assume that each firm first choose a certain
capacity output level for which marginal costs
are constant up to that level and infinite
thereafter.

47

Two-Stage Price Games and

Cournot Equilibrium
A two-stage

game where the firms choose

capacity first and then price is formally identical
to the Cournot analysis.

48

The quantities chosen in the Cournot equilibrium

represent a Nash equilibrium, and the only price that
can prevail is that for which total quantity demanded
equals the combined capacities of the two firms.

Two-Stage Price Games and

Cournot Equilibrium
Suppose

Cournot capacities are given by

qA and qB and that P is the full capacity price.

A situation in which PA PB P is not a Nash

equilibrium since total quantity demanded
exceeds capacity.

49

Firm A could increase profits by slightly raising price

and still selling its total output.

Two-Stage Price Games and

Cournot Equilibrium
Similarly,
PA PB P

50

is not a Nash equilibrium because at least one firm is

selling less than its capacity.
The only Nash equilibrium is PA PB P , which is
indistinguishable from the Cournot result.
This price will be less than the monopoly price, but will
exceed marginal cost.

Comparing the Bertrand and

Cournot Results
The

Bertrand model predicts competitive

outcomes in a duopoly situation.
The Cournot model predict monopolylike
inefficiencies in which price exceed marginal
cost.
The two-stage model suggests that decisions
made prior to the final (price setting) stage can
have important market impact.
51

APPLICATION 12.2: How is the Price

Game Played?
Many

factors influence how the pricing game

is played in imperfectly competitive industries.
Two such factors that have been examined are

52

Product Availability
Information Sharing

APPLICATION 12.2: How is the Price

Game Played?

53

Product availability is an important component of

competition in many retail industries.
The impact of movie availability in the video-rental
industry was examined in 2001 by James Dana.
His data showed that Blockbusters prices were 40%
higher than at other stores.
He argued that Blockbusters higher price in part stems
from its reputation for having movies available and that
those prices act as a signal.

APPLICATION 12.2: How is the Price

Game Played?

54

Firms in the same industry often share information with

each other at many levels.
A 2000 study of cross-shareholding in the Dutch
financial sector showed clear evidence that competition
was reduced when firms had financial interests in each
others profits.
A famous 1914 antitrust case found that a price list
published by lumber retailers facilitated higher prices
by discouraging wholesalers from selling at retail.

Tacit Collusion: Finite Time Horizon

Would

the single-period Nash equilibrium in the

Bertrand model, PA = PB = c, change if the
game were repeated during many periods?

55

With a finite period, any strategy in which firm A,

say, chooses, PA > c in the last period offers B the
possibility of earning profits by setting PA > PB > c.

Tacit Collusion: Finite Time Horizon

The threat of charging PA > c in the last period is not

credible.
A similar argument is applicable for any period
before the last period.

The

only perfect equilibrium requires firms

charge the competitive price in all periods.
Tacit collusion is impossible over a finite
period.
56

Tacit Collusion: Infinite Time

Horizon
Without

a final period, there may exist

collusive strategies.

One possibility is a trigger strategy where each

firm sets its price at the monopoly price so long as
the other firm adopts a similar price.
If

one firm sets a lower price in any period, the other firm
sets its price equal to marginal cost in the subsequent
period.

57

Tacit Collusion: Infinite Time

Horizon
Suppose

the firms collude for a time and firm A

considers cheating in this period.

Firm B will set PB = PM (the cartel price)

A can set its price slightly lower and capture the

entire market.
Firm A will earn (almost) the entire monopoly profit
(M) in this period.

58

Tacit Collusion: Infinite Time

Horizon

Since the present value of the lost profits is given by

(where r is the per period interest rate)
M 1

,
2 r
cheating will be profitable if
M 1

.
2 r

59

This condition holds for values of r < .

Trigger strategies constitute a perfect equilibrium for
sufficiently low interest rates.

Generalizations and Limitations

Assumptions

of the tacit collusion model:

Firm B can easily detect whether firm A has cheated

Firm B responds to cheating by adopting a harsh
response that punishes firm A, and condemns itself
to zero profit forever.

More

general models relax one or both of

these assumptions with varying results.

60

APPLICATION 12.3: The Great

Electrical Equipment Conspiracy
Manufacturing

of electric turbine generators

and high voltage switching units provided a
very lucrative business to such major
producers and General Electric, Westinghouse,
and Federal Pacific Corporations after World
War II.
However, the prospect of possible monopoly
profits proved enticing.
61

APPLICATION 12.3: The Great

Electrical Equipment Conspiracy
To

collude they had to create a method to

coordinate their sealed bids.

This was accomplished through dividing the country

into bidding regions and using the lunar calendar to
decide who would win a bid.

The

conspiracy became more difficult as its

leaders had to give greater shares to other
firms toward the end of the 1950s.

62

APPLICATION 12.3: The Great

Electrical Equipment Conspiracy
The

conspiracy was exposed when a

newspaper reporter discovered that some of
the bids on Tennessee Valley Authority projects
were similar.
Federal indictments of 52 executives lead to
jail time for some and resulted in a chilling
effect on the future establishment of other
cartels of this type.
63

Entry, Exit, and Strategy

Sunk

64

Costs

Expenditures that once made cannot be recovered

include expenditures on unique types of equipment
or job-specific training.
These costs are incurred only once as part of the
entry process.
Such entry investments mean the firm has a
commitment to the market.

First-Mover Advantages
The

commitment of the first firm into a market

may limit the kinds of actions rivals find
profitable.
Using the Cournot model of water springs,
suppose firm A can move first.

65

It will take into consideration what firm B will do to

maximize profits given what firm A has already
done.

First-Mover Advantages

Firm A knows fir Bs reaction function which it can use

to find its profit maximizing level of output.
Using the previously discussed functions.
q B 120

qA
2

q A 120 qB P 120

(120 q A )
P
2

qA
60
P.
2
Solving for q A gives

66

q A 120 2 P.

First-Mover Advantages

Marginal revenue equals zero (revenue andprofits are

maximized) when qA = 60.

With firm As choice, firm B chooses to produce

qB

67

120 q A
(120 60)

30.
2
2

Market output equals 90 so spring water sells for $30

increasing As revenue by $200 to $1800.
Firm Bs revenue falls by $700 to $900.
This is often called a Stakelberg equilibrium.

Entry Deterrence
In

the previous model, firm A could only deter

firm B from entering the market if it produces
the full market output of 120 units yielding zero
revenue (since P = $0).
With economies of scale, however, it may be
possible for a first-mover to limit the scale of
operation of a potential entrant and deter all
entry into the market.
68

A Numerical Example
One

simple way to incorporate economies of

scale is to have fixed costs.
Using the previous model, assume each firm
has to pay fixed cost of $784.

69

If firm A produced 60, firm B would earn profits of

$116 (= $900 - $784) per period.
If firm A produced 64, firm B would choose to
produce 28 [ = (120-64) 2].

A Numerical Example

Total output would equal 92 with P = $28.

Firm Bs profits equal zero [profits = TR - TC =
($2828) - $784 = 0] so it would not enter.
Firm A would choose a price of $56 (= 120 - 64)
and earn profits of $2,800 [= ($5664) - $784].

Economies

of scale along with the chance to

be the first mover yield a profitable entry
deterrence.

70

APPLICATION 12.4: First-Mover Advantages for

Alcoa, DuPont, Procter and Gamble, and Wal-Mart
Consider

71

two types of first-mover advantages

Advantages that stem from economies of scale in

production.
Advantages that arise in connection with the
introduction of pioneering brands.

APPLICATION 12.4: First-Mover Advantages for

Alcoa, DuPont, Procter and Gamble, and Wal-Mart
Economies

72

of Scale for Alcoa and DuPont.

The first firm in the market may overbuild its initial

plant to realize economies of scale when the
demand for the product expands.
Antitrust action against the Aluminum Company of
America (Alcoa) claimed that it built larger plants
than justified by current demand.

APPLICATION 12.4: First-Mover Advantages for

Alcoa, DuPont, Procter and Gamble, and Wal-Mart

73

In the 1970s, DuPont expanded its capacity to

produce titanium dioxide which is a primary coloring
agent in white paint.
Studies suggest that this strategy was successful in
forestalling new investment by others into the
titanium dioxide market.

APPLICATION 12.4: First-Mover Advantages for

Alcoa, DuPont, Procter and Gamble, and Wal-Mart
Pioneering

74

Brands for Proctor and Gamble

Introducing the first brand of a new product

appears to provide considerable advantage over
later-arriving rivals.
Proctor and Gamble was successful in this with
Tide laundry detergent in the 1940s and Crest
toothpaste in the 1950s.
New products are a risk for consumers, and if the
first one works, consumers may stick with it.

APPLICATION 12.4: First-Mover Advantages for

Alcoa, DuPont, Procter and Gamble, and Wal-Mart
The

75

Wal-Mart Advantage

Its success stems from its first mover advantage in

economies of scale and its initial small town
strategy.
Started in the 1960s, it started serving smaller,
mostly Southern markets.
This profitable near monopoly situation allowed it
to grow and gain economies of scale in distribution
and in buying power.

Limit Pricing
A limit

price is a situation where a

monopoly might purposely choose a low
(limit) price policy with a goal of deterring
entry into its market.

76

If an incumbent monopoly chooses a price

PL < PM (the profit-maximizing price) it is
hurting its current profits.
PL will deter entry only if it falls short of the
average cost of a potential entrant.

Limit Pricing

If the monopoly and potential entrant have the

same costs (and there are no capacity
constraints), the only limit price is PL = AC, which
results in zero economic profits.

Hence,

the basic monopoly model does not

provide a mechanism for limit pricing to work.
Thus, a limit price model must depart from
traditional assumptions.
77

Incomplete Information
If

an incumbent monopoly knows more about

the market than a potential entrant, it may be
able to use this knowledge to deter entry.
Consider Figure 12.3.

78

Firm A, the incumbent monopolist, may have high

or low production costs based on past decisions
which are unknown to firm B.

FIGURE 12.3: An Entry Game

1,3
Entry

B
No entry

High cost

A
Low cost

79

4,0

Entry

3, -1

No entry

6,0

Incomplete Information

80

Firm B, the potential entrant, must consider both

possibilities since this affects its profitability.
If

As costs are high, Bs entry is profitable (B = 3).

If

As costs are low, Bs entry is unprofitable

(B = -1).

Firm A is clearly better off if B does not enter.

A low-price policy might signal that firm A is low cost
which could forestall Bs entry.

Predatory Pricing
The

structure of many predatory pricing

models also stress asymmetric information.
An incumbent firm wishes its rival would exit
the market so it takes actions to affect the
rivals view of future profitability.
As with limit pricing, the success depends on
the ability of the monopoly to take advantage
of its better information.
81

Predatory Pricing
Possible

strategies include:

Signal low costs with a low-price policy.

Adopt extensive production differentiation to indicate
the existence of economies of scale.

Once

a rival is convinced the incumbent firm

possess an advantage, it may exit the market,
and the incumbent gains monopoly profits.

82

APPLICATION 12.4: The Standard Oil

Legend

83

The Standard Oil case of 1911 was one of the

landmarks of U.S. antitrust law.
In that case, Standard Oil Company was found to have
attempted to monopolize the production, refining, and
distribution of petroleum in the U.S., violating the
Sherman Act.
The government claimed that the company would cut
prices dramatically to drive rivals out of a particular
market and then raise prices back to monopoly levels.

APPLICATION 12.4: The Standard Oil

Legend

84

Unfortunately, the notion that Standard Oil practiced

predatory pricing policies in order to discourage entry
and encourage exit by its rivals makes little sense in
terms of economic theory.
Actually, the predator would have to operate with
relatively large losses for some time in the hope that
the smaller losses this may cause rivals will eventually
prompt them to give it up.
This strategy is clearly inferior to the strategy of simply
buying smaller rivals in the marketplace.

APPLICATION 12.4: The Standard Oil

Legend

85

In a famous 1958 article, J.S. McGee concluded that

Standard Oil neither trieds to use predatory policies nor
did its actual price policies have the effect of driving
rivals from the oil business.
McGee examined over 100 refineries bought by
Standard Oil and found no evidence that predatory
behavior by Standard Oil caused these firms to sell out.
Indeed, in many cases Standard Oil paid quite good
prices for these refineries.

N-Player Game Theory

The

most important additional element added

when the game goes beyond two players is the
possibility for the formation of subsets of
players.
Coalitions are combinations of two or more
players in a game who adopt coordinated
strategies.

86

A two-person game example is a cartel.

N-Player Game Theory

The

formation of successful coalitions in nplayer games if influenced by organizational

costs.

87

Information costs associated with determining

coalition strategies.
Enforcement costs associated with ensuring that a
coalitions chosen strategy is actually followed by its
members.