Information Economics and Game Theory for Management Starting Jan 2012 Instructor: Jonathan Peterson

2 What is game theory? Study of rational behavior in interactive or interdependent situations Provides a framework for thinking about strategic interactions Game theory is not useful when individuals are facing impersonal market forces – For example, a seller of a product in a competitive market For example, two newspaper publishers in a city choosing prices are players in a game with each other – BUT the publishers are not in a game with individual readers because readers ignore their effect on the publishers Jonathan PetersonGame Theory: Introduction

Objectives Solve simple exercises. Apply to business situations and opportunities. Discuss how to identify and approach interesting and important topics for research.

4 Approaches to learning strategic game theory Example/case based – Pro: Relevance, connection of theory to application – Con: Generality Theory – Pro: General principle is clear – Con: Applying it may not be Jonathan PetersonGame Theory: Introduction

5 Approaches to learning strategic game theory We’ll do some of both Each lecture will be organized around a single principle Seminars will reinforce and combine topics – In-class games Stripped down to essentials – Case applications – Presentations

6 Course outline Foundations 1. Basic language of game theory 2. Dominant strategies: Auctions The prisoner’s dilemma and solutions 3. Tacit collusion: AA Value Pricing case 4. Hardcore collusion: ADM and the lysine cartel 5. Presentations on cartels 6. Strategic commitment: Philips CD capacity decision, Boeing in very large airplanes Jonathan PetersonGame Theory: Introduction

7 Course outline Entry and exit 7. Predatory pricing 8. Deterring entry with brand proliferation and bundling 9. Additional entry topics: Limit pricing, reputation, brand-building 10. War of attrition Jonathan PetersonGame Theory: Introduction

Course outline Asymmetric information 11.Adverse selection 12.Moral hazard Possible additional topics 13.Judo strategies; real-world evidence about game theory 14.Game theory in M&A 8 Jonathan PetersonGame Theory: Introduction