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Game Theory Approaches To Bargaining, Conflict, and Negotiation
Game Theory Approaches To Bargaining, Conflict, and Negotiation
Course Overview
Price Dispersion
Visit any Internet price comparison site and
you’ll notice a large range in prices for an
identical item
Why the range in prices?
Branding
Awareness
Stock on hand
Strategy
The Strategy of Unpredictability
Firms sell to price conscious shoppers as
well as “loyal” consumers
Cutting price to attract shoppers eats into
profits from loyals
At the same time, offering a low price has a
big payoff from the shoppers (elasticity = 51).
It pays for a firm to be unpredictable in its
pricing
CPU Competition
Intel and AMD compete fiercely to develop
innovations in CPUs for PCs
As a result of this, CPU speeds have
increased dramatically, but there are few
differences between the products of the two
companies
Prisoner’s Dilemma
Even though both companies expended huge
amounts of money to gain a competitive
advantage, their relative competitive position
ends up unchanged.
Both companies are worse off than if they had
each slackened the pace of innovation
This is an example of a prisoner’s dilemma
Sale Price Guarantees
Circuit City and many other stores offer sale
price guarantees
If an item comes on sale in the time period
after you bought it, they will match the
difference in prices
Thus, consumers wishing to buy now are
“protected” against regrets from future price
reductions
Walking Down the Demand Curve
Circuit City would like to sell goods at high
prices to those with high willingness to pay for
them and then lower prices to capture those
with lower willingness to pay.
They might do this by running sales after new
items have been out for a while
But high value consumers will anticipate this
and wait for the sale to occur.
The Power of Commitment
By offering to rebate back the difference in
prices, Circuit City makes the sale strategy
less profitable for its “future” self.
This commits it to less discounting in the
future
And enables it to charge higher prices
today…and tomorrow.
Seasoned Equity Offerings
When owner-managed companies make
seasoned equity offerings, the price of its
stock declines by more than the dilution from
the new offering
Why should this be? Companies seek access
to equity finance because they have some
promising new project
Isn’t this good news about the company?
Signaling
The seasoned offering is a signal about the
status of the companies current projects as
well as future ones.
If the current projects are not profitable, the
cost (in dilution) to the owner-manager of
issuing new share is lower.
Therefore, the seasoned offering indicates
bad news about the present condition of the
firm as well as a low threshold for the
profitability of the new project
Strategies for Studying Games of
Strategy
Two general approaches
Case-based
Pro: Relevance, connection of theory to
application
Con: Generality
Theory
Pro: General principle is clear
Con: Applying it may not be
Approach of this course
Intermediate between theory and cases
Lectures organized around a single general
principle.
Illustrated with cases and experiments
Cases are “stripped down” to essentials
Constant reality checks
When does theory work?
When doesn’t it?
Why doesn’t it?
Some Background Common to All
Games
Games versus Decisions
Nature is not a strategic player
Individual decisions might still be games if
there are control problems with future “self”
Large versus Small Numbers
Games typically thought to pertain to small
numbers of players
But large markets can become small
Bilateral contracting/holdup problems
Information/signaling – market for venture capital
Classifying Games
Sequential v simultaneous
Stackelberg/Cournot
Distributive v integrative
Matching pennies/coordination
One-shot v repeated
Public v private information
Fixed v manipulable rules
Enforceable v unenforceable cooperative
agreements
Terminology
Strategies
Choices available to each of the players
Might be conditioned on history
Payoffs
Some numerical representation of the
objectives of each player
Could take account fairness/reputation, etc.
Does not mean players are narrowly selfish
Standard Assumptions
Rationality
Players are perfect calculators and
implementers of their desired strategy
Common knowledge of rules
All players know the game being played
Equilibrium
Players play strategies that are mutual best
responses
The Uses of Game Theory
Explanatory
A lens through which to view and learn from
past negotiations/conflicts
Predictive
With many caveats
Prescriptive
The main thing you’ll take out of the course is
an ability to think strategically