CHAPTER 13:

STRATEGIES OVER TIME

Game Theory

Game theory is a set of tools used by economists and others to analyse strategic decision making.

Game theory has many practical applications. It is particularly useful for analysing how oligopolistic firms set
prices, quantities, and advertising levels.

Economists also use game theory to analyse bargaining between unions and management or between the buyer
and seller of a car, interactions between polluters and those harmed by pollution, transactions between the
buyers and sellers of homes, negotiations between parties with different amounts of information (such as
between car owners and auto mechanics), bidding in auctions, and many other economic interactions.

Game is an interaction between players (such as individuals or firms) in which players use strategies.

A strategy is a battle plan that specifies the actions or moves that a player will make.

An action is a single move that a player makes at a specified time within a business game.

Nash Equilibrium

The idea that players use the best responses is the basis for the Nash equilibrium, a solution concept for games
formally introduced by John Nash (1951).

The Nash equilibrium is the primary solution concept used by economists in analyzing games. It allows us to find
solutions to more games than just those with a dominant strategy solution.

If a game has a dominant strategy solution, then that solution must also be a Nash equilibrium.

However, a Nash equilibrium can be found for many games that do not have dominant strategy solutions.

Types of Business Strategy Games

• There are 2 Types of Games in context of business: -

1. Static Games in which firms make simultaneous decisions and in which each firm has just a
single action to take, such as producing a particular output level, charging a particular price, or
choosing a particular level of advertising.

2. Dynamic Games in which firms act at different times. In these games, players can move either
repeatedly or sequentially.

Static Games

• In a static game, an action and a strategy are identical.

• The static game lasts for only one period, so the action taken in that period represents the full battle plan
or strategy.

• For example, if two firms play a static game in which their only two possible actions are to set a high price
or a low price, then the firms’ only possible strategies are the same as the actions: set either a high price
or a low price.
Dynamic Games

• In contrast, in Dynamic Games actions and strategies differ.

• If a static game in which the firms choose either a high price or a low price is played repeatedly period
after period, a firm’s strategy determines its action in each period.

• One possible strategy is for the firm to set a low price for each period. However, it could use a more
complex strategy, such as one in which its action in each period depends on its rival’s actions in previous
periods. For example, a firm could set a high price in the first period and then, in subsequent periods, it
could set its price at the same level that its rival chose in the previous period.

Repeated Games

• In real-world markets, interactions between firms are often repeated.

• In a single-period (Static) game, each firm must choose its action before observing the rival’s action.

• Therefore, a firm’s choice cannot be influenced by its rival’s action. It chooses its best response given
what it expects the rival to do.

• When the same game is played repeatedly, one player may use a strategy in which its action in the current
period depends on his rival’s observed actions in previous periods.

• For example, in this repeated game each player may use a strategy where it threatens to punish its rival
in later periods by producing a high level of output if its rival produces a high level of output in an early
period.

Trigger Strategy

• Is a strategy in which a rival’s defection from a collusive outcome triggers a punishment.

• The trigger strategy is extreme because a single defection calls for a firm to permanently.

• punish its rival by producing high output in all subsequent periods.

• Less extreme trigger strategies can also be used. For example, a strategy that involved just two periods of
punishment for a defection would still be likely to make defection unattractive in this example.

• Firms would prefer the cooperative outcome and would probably achieve it in a game as straightforward
as this one. However, such cooperation may not be possible in real markets because of antitrust and
competition laws or because of limited information.

Tit for Tat Strategy

• This strategy involves cooperating in the first round and then copying the rival’s previous action in each
subsequent round.

• Thus, producing high output in one period would induce punishment

(high output by the rival) in the next.

• The level of punishment in this tit-for-tat strategy might not be enough

to induce cooperation, depending on how much firms discount future
gains and losses relative to those in the current period.

• Experiments show that this strategy has the highest payoff in

repeated games.
Implicit vs Explicit Collusion

• In most modern economies, explicit collusion among the firms in an industry is illegal.

• Firms are prohibited from meeting and agreeing to restrict their outputs or to set high prices. However,
antitrust or competition laws do not strictly prohibit choosing the cooperative (cartel) quantity or price if
no explicit agreement is reached.

• Thus, if the firms never meet and openly discuss their behavior, they can produce at the collusive level
with little chance of running afoul of the law.

• Firms may be able to engage in such implicit collusion or tacit collusion using trigger, tit-for-tat, or other
similar strategies.

• For example, if one firm lowers its output in the current period in the hopes that other firms will follow its
lead in the next period, it may have stayed within the law as long as it doesn’t explicitly communicate with
the other firms.

• Nonetheless, tacit collusion lowers society’s total surplus just as explicit collusion does.

Sequential Games

• Static Cournot games is games in which firms choose output levels. In that game, firms do not bargain
over output levels. Sequential Games can be studied in context of a repeated Cournot game.

• More generally, a sequential game can have many stages or decision points, such as a game where the
players alternate moves indefinitely.

• In other dynamic games, firms move sequentially, with one player acting before another. By moving first,
a firm can make a commitment or credible threat.

• Consequently, the first mover may receive a higher profit than if the firms act simultaneously.

In sequential games, players make decisions in a specific order, knowing the actions of players who have
already moved. This note explores sequential games in the context of business strategy, analyzing the impact
of strategic decision-making on outcomes. The note also delves into the concept of credible threats and how
commitment can influence the dynamics of decision-making in a game. Furthermore, it discusses the role
of commitment in game theory and provides real-world examples to illustrate the concepts discussed.
Introduction to Sequential Games and Strategies over Time

Understanding the concept of sequential games and the importance of strategies over time

Sequential games involve players making decisions in a specific order. This order of decision-making creates
a strategic environment where each player's action affects the outcome. Strategies over time help players
anticipate and respond to their opponents' moves. By considering the potential actions of other players,
individuals can make informed decisions and maximize their outcomes. Analyzing strategies over time is
crucial for long-term success in competitive situations. Understanding the consequences of different
actions at each stage of the game allows players to develop effective strategies.

Sequential Game Dynamics (Credible Threats and Commitment)

1. Sequential Game Strategies

Sequential games involve players making decisions in a specific order, with each player's actions influencing
subsequent outcomes. Understanding the dynamics of sequential games is crucial for formulating effective
business strategies.

2. Credible Threats in Game Theory

Credible threats play a significant role in determining the outcomes of simultaneous-move and sequential-
move output games. It explores why the outcomes of sequential-move games differ from simultaneous-
move games and the impact of commitment on decision-making.

3. Role of Commitment in Decision-Making

Commitment in the context of game theory is essential for establishing credible threats. It influences a
player's strategy and the perceived rationality of their actions, thus shaping the dynamics of decision-making
in sequential games.

4. Real-World Examples of Commitment

The note provides real-world examples to illustrate the concept of commitment in strategic decision-making.
It highlights how commitment influences behavior and can be used to deter rival firms from entering the
market.

Credible Threats in Sequential Games

Examining the role of credible threats in influencing opponents' behavior. A credible threat is a commitment
to take a particular action if necessary. By making a believable threat, a player can influence their opponent's
behavior and achieve their desired outcome.

Credible threats can deter opponents from taking unfavorable actions. When an opponent believes that a
threat will be carried out, they are more likely to avoid actions that could lead to negative consequences.

Creating credible threats requires careful consideration of the opponent's preferences and beliefs. To be
effective, a threat must be believable and align with the opponent's understanding of the game.

Deterring Entry through Strategic Moves (Using strategic moves to deter potential entrants in a market)

Strategic moves can be employed to discourage new competitors from entering a market. By signaling a
strong commitment to defending market share, existing players can discourage potential entrants.

Strategic moves may involve aggressive pricing, product innovation, or exclusive partnerships. Creating
barriers to entry through these actions can make it more difficult for new competitors to establish
themselves.

Deterring entry through strategic moves requires a deep understanding of the market dynamics and
competitors' capabilities. Effectively deterring entry involves anticipating potential entrants' responses and
formulating appropriate strategies.
Deterring Entry in the Market

Strategic Game Theory

1. Exclusion Contracts

The concept of exclusion contracts is explored, where firms use strategic agreements to deter potential rivals
from entering the market, thereby maintaining their monopoly position. It unveils the strategic implications
of using exclusion contracts as a deterrent strategy.

2. Pay-for-Delay Agreements

The note delves into the use of pay-for-delay agreements by firms to delay the entry of competitors following
the expiration of patents. It explores the legal and strategic aspects of such agreements and their
implications for market competition.

The Importance of Exclusion Contracts in Business Strategy

Exploring the role of exclusion contracts in shaping business strategies

1. Exclusion contracts are agreements that restrict access to certain resources or markets. These contracts
can be used to limit competition and maintain a firm's market power.
2. Exclusion contracts can prevent rivals from accessing key inputs or distribution channels. By controlling
critical resources, a firm can maintain a competitive advantage and deter potential competitors.
3. The use of exclusion contracts requires careful legal and strategic considerations. The legality and
enforceability of these contracts vary across jurisdictions, and firms must navigate these complexities.

Limit Pricing as a Strategy for Entry Deterrence

Examining the concept of limit pricing and its role in deterring entry

Limit pricing is a strategy where an incumbent firm sets prices low to discourage entry by operating with low
profit margins, the incumbent makes it unattractive for potential entrants to implementing a successful limit
pricing strategy requires careful analysis of costs, demand elasticity, and potential competitors’ reactions.

The incumbent must ensure that the low prices are sustainable and that potential entrants will not simply
undercut them.

Limit pricing can be used to signal the incumbent's commitment to aggressive competition. Potential
entrants may view low prices as a sign that the incumbent will respond fiercely to entry attempts.
Limit Pricing and Entry Deterrence (Strategic Cost Management)

• Strategies for Limit Pricing

The concept of limit pricing is discussed, where firms strategically set prices or output levels to deter
potential rivals from entering the market profitably. It analyzes the role of credibility in limit pricing strategies
and their impact on market entry.

• Case Study: Pfizer's Use of Limit Pricing

The note presents a case study on Pfizer's use of limit pricing to slow the entry of generic competitors
following the expiration of drug patents. It provides insights into the strategic implications and outcomes of
using limited pricing as an entry deterrence strategy.

• Entry Deterrence in Repeated Games

The dynamics of entry deterrence in repeated games are examined, highlighting the strategic implications of
firms engaging in unprofitable actions to establish a reputation for being a tough competitor. It discusses the
role of reputation and incomplete information in shaping entry deterrence strategies.

Repeated Games and Entry Deterrence (Understanding role of repeated games in entry deterrence strategies)

• Repeated games involve multiple rounds of interaction between players. In these games, players' decisions
in one round can affect the outcomes in subsequent rounds.
• In entry deterrence, repeated games can be used to maintain market power over the long term. By
establishing a reputation for aggressive responses to entry attempts, incumbents can discourage potential
competitors.
• Repeated games allow players to learn from past interactions and adjust their strategies. Players can use the
knowledge gained from previous rounds to refine their entry deterrence strategies.

Cost and Innovation Strategies in Business

Cost advantage and innovation play a crucial role in shaping competitive dynamics in business. This section
explores the strategic importance of gaining a cost advantage through process innovation and the
implications of such investments. Additionally, it discusses the strategic implications of investing in R&D to
lower marginal costs and its impact on deterring potential rivals from entering the market.
Strategic Investment in Process Innovation (Impact on Entry Deterrence)

1. Strategic Investment in R&D

The strategic implications of investing in process innovation to gain a cost advantage and deter potential
rivals from entering the market are examined. It analyzes how such investments influence competitive
dynamics and market entry.

2. Role of Process Innovation in Market Dominance

Process innovation is explored as a strategic tool for establishing market dominance and deterring entry by
potential rivals. It investigates the relationship between process innovation, cost advantages, and its impact
on market competition.

3. Reputation and Strategic Investments

The note delves into how strategic investments in process innovation contribute to establishing a reputation
for being a formidable competitor, influencing the decisions of potential rivals to enter the market. It
discusses the strategic implications of reputation-building through investments in R&D.

4. Case Study: Market Entry Deterrence through Innovation

A case study on a company utilizing process innovation to deter potential rivals from entering the market is
presented, shedding light on the strategic implications and outcomes of using innovation as an entry
deterrence strategy.

Strategic Cost Management and Market Entry (Investment Strategies for Market Dominance)

1. Strategic Investment and Market Entry

The strategic implications of investing in cost management and innovation for deterring potential rivals from
entering the market are examined. It analyzes the role of investment strategies in establishing market
dominance and shaping competitive dynamics.

2. Long-Term Implications of Strategic Investments

The note delves into the long-term implications of strategic investments in cost management and innovation,
focusing on their impact on market competition and the establishment of a sustainable competitive
advantage.

3. Risk and Reward in Investment Strategies

It discusses the trade-offs between risk and potential rewards associated with strategic investments in cost
management and innovation. It investigates the strategic considerations firms need to factor in when making
investment decisions for market entry deterrence.

Cost and Innovation Strategies for Long-Term Success

Exploring the relationship between cost management, innovation, and long-term success

Cost management strategies focus on reducing expenses and improving operational efficiency. By
minimizing costs, firms can achieve competitive pricing and higher profit margins.

Innovation strategies involve developing new products, services, or processes to gain a competitive edge.
Innovative firms can differentiate themselves from competitors and attract customers with unique offerings.

Combining cost management and innovation strategies is often key to achieving long-term success. By
continuously improving efficiency and offering Innovative solutions, firms can adapt to changing market
conditions and maintain a competitive.
Investing to Lower Marginal Cost and Increase Efficiency

Understanding the importance of investments in lowering marginal cost and improving efficiency

Investments in technology, equipment, or process improvements can lower marginal costs. By reducing the
cost of producing each additional unit, firms can increase profitability and competitiveness.

Lowering marginal costs allows firms to offer competitive prices and attract more customers. Customers are
more likely to choose products or services that provide value for money.

Improving efficiency through investments can also lead to higher productivity and faster delivery times.
Efficient operations enable firms to meet customer demands more effectively and gain a reputation for
reliability.

Learning by Doing: How Experience Shapes Strategy

Examining the concept of learning by doing and its impact on strategy development

Learning by doing refers to the process of gaining knowledge and skills through practical experience. As firms
engage in activities over time, they acquire insights that shape their strategies.

Experience allows firms to understand market dynamics, customer preferences, and competitors' behavior.
This knowledge helps firms make informed decisions and develop effective strategies.

Learning by doing is an ongoing process that requires continuous adaptation and improvement. Firms must
actively seek feedback, analyze results, and apply lessons learned to refine their strategies.

Raising Rivals' Costs: A Game of Strategy (Exploring the concept of raising rivals' costs as a strategic move)

Raising rivals' costs involves taking actions that increase competitors' expenses or reduce their profitability.
By making it more difficult for rivals to compete, firms can enhance their own market position.

Strategic moves to raise rivals' costs can include aggressive pricing, exclusive partnerships, or patent
acquisitions. These actions limit rivals' resources or market access, making it harder for them to challenge
the firm's position.

Raising rivals' costs requires careful consideration of legal and ethical boundaries. Firms must ensure that
their actions comply with competition laws and do not harm consumers or the overall market.

Strategies for Businesses in Competitive Markets

1. Deterring Entry by Investing:

Explanation: Businesses can strategically make investments that lower their own profits in the short term but
deter potential rivals from entering the market.

Example: An incumbent airline might invest in expanding its fleet, even if it doesn't immediately fill those
extra seats. This signals to potential competitors that the market is already crowded, discouraging them from
entering.

2. Learning by Doing to Reduce Costs:

Explanation: The more experience a company has in producing a good, the more efficient it becomes,
lowering its marginal costs over time.

Example: Aircraft manufacturers like Lockheed Martin initially priced their L-1011 planes below their
marginal costs. This allowed them to learn and improve efficiency, eventually lowering costs and gaining a
competitive advantage over later entrants.
3. Raising Rivals' Costs:

Explanation: Businesses can strategically take actions that increase their own costs but raise those of their
rivals even more. This can create a cost advantage for the first mover. Examples:

• Lobbying for regulations: Companies might lobby for stricter pollution controls or safety standards
that apply only to new entrants, raising their costs.
• Switching fees: Imposing fees on customers who want to switch to a competitor can make it more
expensive for rivals to attract customers.
• Proprietary software and patents: Designing software or products that are incompatible with rivals'
offerings, or patenting key technologies, can make it harder and more expensive for competitors to
compete.
4. Raising Consumer Switching Costs:

Explanation: Companies can make it more costly or inconvenient for consumers to switch to a rival's product,
reducing the threat of competition.

Examples:

• Contractual obligations: Requiring long-term contracts or charging early termination fees can lock
customers in.
• Loyalty programs: Rewarding customers for repeat business can create incentives to stay with the
incumbent.
• Compatibility issues: Designing products that only work with other products from the same company can
make it difficult to switch to a competitor's ecosystem.

These strategies are not always ethical or beneficial to consumers. It's important to consider the potential
impact on competition and consumer welfare before implementing them.

Example for duopoly in Competitive Markets

Firm 1 and Firm 2, that are in a duopoly market. The firms are both hiring workers from the same Labor union,
which sets the same wage for both firms. The industry that the firms are in is suffering from a downturn in
demand, so the union is willing to accept the current wage. However, if Firm 1 agrees to a higher wage, its cost of
production will rise by less than Firm 2's cost.

As you can see from the game tree, Firm 1 would make a higher profit if it agrees to a higher wage. This is because
Firm 2's cost of production would rise more than Firm 1's cost of production. As a result, Firm 2 would produce
less output, which would drive up the price of the product. This would benefit Firm 1, as it would be able to charge
a higher price for its product.

The firms in a duopoly market can choose a higher wage for their workers. The example shows that it can be
beneficial for a firm to agree to a higher wage, even if it means that its cost of production will rise. This is because
the firm's competitor's cost of production will rise even more, which will give the firm a competitive advantage.
Holdup Problem Overview:

Occurs when two firms engage in a transaction, and one must make a specific investment that can only be used
in the transaction with the second firm. Risks arise if the second firm takes advantage of the first firm's specific
investment, leading to losses for the first firm.

If the first firm doesn't anticipate opportunistic behaviour by the second firm, it may lose part of its investment,
putting it at a disadvantage. If the first firm anticipates such behaviour, it may refrain from making the specific
investment, causing both firms to lose potential transaction benefits.

Fisher Body faced a holdup problem when considering producing metal parts for GM cars, requiring specific dies.
Fear of losing these dies as hostages led to concerns about potential exploitation by GM.

Formal Analysis: Nationalization Example in Venezuela

ExxonMobil, an oil company, faces a holdup game with the Venezuelan government. ExxonMobil contemplates
a large investment for oil drilling and refining in Venezuela or another country. If Venezuela honours the deal,
ExxonMobil expects to earn $20 billion; otherwise, $10 billion elsewhere. The Venezuelan government, as the
second mover, holds the oil company's investment as a hostage, making nationalization a strategic move for the
government.

Initial profit for ExxonMobil without nationalization: πx = 20.0

After (partial) nationalization, profit decreases to 1πx = 8.8

The difference (12) goes to the Venezuelan government. Consequently, π increases from 20 to 32 due to
nationalization. If no nationalization is expected, ExxonMobil makes the investment for a profit of 20, preferring
it over the 10 it would earn elsewhere. However, if nationalization is anticipated, the company earns only 8,
leading it to invest elsewhere. ExxonMobil avoids an investment that would benefit both the company and
Venezuela.

In the 1990s, private oil companies like Mobil, Chevron-Texaco, Statoil, ConocoPhillips, and BP invested in a joint
venture with Venezuela's state-owned oil company PDVSA in the Orinoco Oil Belt. Initially promised certain
treatment, their ownership shares were reduced in 2007 by President Hugo Chavez, who partially nationalized
the Orinoco Oil Belt, with PDVSA gaining a minimum of 60% ownership.

Venezuelan President Chavez aimed for majority control of the oil industry, leading to disputes with ExxonMobil
and ConocoPhillips. After arbitration, Exxon received $1.6 billion in 2014, less than demanded. Despite the
fallout, Venezuela later laid claim to ExxonMobil's Guyana oil discovery in 2015. The text argues that
nationalization, as seen in Cuba, harms reputation and deters foreign investment, yet some investment occurred
in Venezuelan oil despite partial nationalizations. The situation raises questions about the long-term impact on
Venezuela's economic relationships.

Managerial Implications: Avoiding Holdups

Managers should seek ways to avoid losing money due to holdups. There are five frequently used approaches:

1- Contracts,

2- Vertical integration,

3- Quasi-vertical integration,

4- Reputation building,

5- Multiple or open sourcing.

For alleviate the fears many managers use contracts to prevent holdup problems, such as Fisher Body Co.
signed a 10-year exclusive cost-plus contract with GM stipulating, that Fisher Body would be the exclusive
supplier for GM. After a few years under the contract, unanticipated holdup problems occurred between GM
and Fisher Body. To eliminate them, GM bought Fisher Body, vertically integrating with its parts supplier.

Quasi-vertical integration is a contracting solution that mimics vertical integration. The biggest danger to Fisher
Body was that it would invest in expensive machines whose only use was to produce parts for GM cars.

To avoid this danger before the two firms merged, GM partially or quasi-vertically integrated with Fisher Body, by
paying for and owning the specific physical asset rather than buying all of Fisher.

According to that Fisher and GM were both protected against holdups. If something went wrong in their
relationship, Fisher could transfer GM’s dies back to GM and both firms could walk away unharmed.

If GM goes many years without behaving opportunistically (Reputation building), then new suppliers are unlikely
to worry about having their specific investments held as hostages by GM.

Managers can use multiple sources to avoid holdup problems.

Some firms prefer to use the open-source Linux computer operating system rather than proprietary Windows
and Mac operating systems. where it can modify the code itself, if need be, the user firm is not subject to a holdup
problem.

Too-Early Product Innovation

Introducing the first product in a new product class gives a firm important advantage.

The early innovator may:

✓ Earn substantial profits before competing products enter.

✓ Many consumers become loyal to the initial product.

So, that later entrants find it difficult to take market share from the leader firm.

The disadvantages of entering early are:

✓ The cost of entering quickly is higher.

✓ The odds of miscalculating demand are greater.

✓ Later rivals may build on the pioneer’s research to produce a superior product.

Mini-Case: Advantages and Disadvantages of Moving First

We have seen how a firm that enters the market first gains an advantage over potential rivals by moving first. The
first-mover firm may prevent entry by developing production processes that lower its marginal cost, raising costs
to potential rivals, or getting an early start on learning by doing.

First movers do not always gain an advantage. Toshiba, the main proponent of HD DVD, spent large sums of
money to be the first to sell a next generation DVD in 2006. It sold its initial HD-DVD player for $499 even though
it contained $700 worth of components. In 2007, the backers of HD DVD paid Paramount and Dream- Works a
combined $150 million to adopt their format. However, when most content producers sided with Blu-ray, Toshiba
stopped producing HD-DVD players in February 2008, conceding the market to Blu-ray.

Sony pioneered modern smartwatches with its 2013 Sony Smartwatch. However, Sony lost command of the
market to the Apple Watch, which had a 75% market share in early 2015. The Apple Watch gained an advantage
because it had considerable number of apps, most of which were created by third-party developers of iPhone
and iPad apps.
Behavioural Game Theory

Which seeks to augment the rational economic model to better understand and predict economic decision
making.

Ultimatum Game: The game involves players making sequential moves in a simple take-it-or-leave-it bargains
environment.

One person makes an offer “Proposer” and another person takes it or leaves it “Receiver” with no option to make
a counter offer, it’s a sequential game.

Mini Case: G.M. Ultimatum to one fourth its dealerships in USA and Canada that Brings Showdown with Worker,
it offered dealers slated for closure an ultimatum, they would receive a small payment from GM if they did not
oppose the restructuring plan. Dealers could accept the ultimatum and get something from GM or reject it and
receive nothing, in 2011, some terminated Canadian dealers filed a class-action suit against GM of Canada, they
lost their case in 2015.

An Experiment: In a computer lab experiment the participants divided into proposers and responders matched,
the game is dividing $10, in the first stage the prosper should offer the lowest possible positive amount and the
second stage the responder should accept any positive offer. A responder who accepts the offer received the
amount offered the proposer gets the rest of $ 10, If the responder rejects the offer both players get nothing.
However, such a rational behaviour is not a good predictor of actual outcomes, the most common range for offers
is range from $3 to $4 far more the rational “minimum offer”. However, when the total amount to be divided
increased into $100, the results unchanged, typically the offer remains between %30 and %40 of the total.

Reciprocity: Some responders who reject lowball offers feel the proposer is being greedy, some responders are
angered, some feel insulted, and some feel that they should oppose “unfair” behaviour, most proposers
anticipate such feelings and offer a significant amount to the responder but always less than %50. Analysis of
ultimatum games is useful partly because ultimatums arise in genuine business interactions.

For example : good managers often take account actions by providing benefits over and above the minimum
needed , rather than squeezing every cent they can from workers , as it clears that workers who feel exploited
might quite or go on strike even when it against their economic interest , in contrast workers who feel well treated
often develop a sense of loyalty that cause them to work harder than needed.

Levels of Reasoning: John Maynard Keynes (1936) argued that investment decisions are often based on "animal
spirits" rather than rational calculation. He suggested that determining stock value is like predicting the outcome
of a beauty contest, based on what others think the stock is worth. Modern experimental economists have
focused on testing whether decision-makers can rationally infer the likely assessments and actions of others in
strategic games.

Managerial Implication (Taking Advantages of Limited Strategic Thinking)

Managers should consider the strategic sophistication of customers and competitors. Hollywood movie studios
use cold openings to generate buzz for good movies, but this strategy can be counterproductive for poor ones.
While some moviegoers understand this tactic, others don't, leading to higher revenue and profit. Therefore,
managers should not overestimate the reasoning ability of the general moviegoing public.

Intel and AMD’s Advertising Strategies

In the market for CPUs for personal computers, Intel and

AMD have different strategies due to their advertising
strategies.

Intel decides on how much to invest in its advertising

campaign before AMD can act, while AMD decides whether
to advertise heavily. Intel intensively advertises because it
produces a higher profit than a low-key campaign.