1. Strategic Management/ Business Policy
Power Point Set #9:
Game Theory and Strategy

2. Game Theory and Strategy
Key Concept: Preemption of Strategically Valuable Assets
Access to raw materials (e.g., Alcoa)
Wal-mart’s rural strategy

3. Analyzing Competitive Dynamics Commitment Vs. Flexibility
Game-theoretic preemption strategy
Flexibility
Real (Strategic) Options Analysis

4. Game Theory and Strategy
Prisoners’ Dilemma Game
Row
Silence
Fink
Column -1
-10 -8

5. Game Theory and Strategy
Prisoners’ Dilemma Game
Row Player: Dominant Strategy: Fink
Column Player: Dominant Strategy: Fink
Dominant Strategy (Nash) Equilibrium: (-8, -8)
Note: It is a dilemma since if they both cooperated by remaining silent: (-1, -1). -1
-10 -8

6. Game Theory and Strategy
The Prisoners’ Dilemma Game can occur in many contexts:
What is best for an individual may not be best for a division;
What is best for a division may not be best for a firm;
What is best for a firm many not be best for an industry;
What is best for an industry may not be best for a nation; and
What is best for a nation may not be best for the world.

7. Game Theory and Strategy
Now that we have learned the concept of dominant strategy equilibrium, there is a second important equilibrium concept called a Nash equilibrium.
Note: All dominant strategy equilibrium are Nash equilibrium, but not all Nash equilibrium are dominant strategy equilibrium.

8. Game Theory and Strategy
Game with no dominant strategy equilibrium, but a Game with one Nash equilibrium:
Row
Cooperate
Fink
Column 5 4 1 9 -1

9. Game Theory and Strategy
A cooperative game with conflict
Game with multiple (two) Nash equilibria
Man
Prize Fight
Ballet
Woman 2 -1 1 -5

10. Game Theory and Strategy
Suppose this game were played sequentially?
Would it be better to go first or second?
Man
Prize Fight
Ballet
Woman 2 -1 1 -5

11. Game Theory and Strategy
Would you want to move first or second?
Man
Prize Fight
Ballet
Woman 10
100 20 4 90 30 8 6

12. Game Theory and Strategy
Joint Venture GM
Cooperate
L. Race
Toyota
112
123 58 91

13. How Can “Commitment” Affect A Competitor’s Response?
Commitment = An Irreversible Action (Sunk Costs) GM
Cooperate
L. Race
Toyota
112
123
-28 58 91
-51

14. How Can “Commitment” Affect A Competitor’s Response?
Mutual sunk cost commitments GM
Cooperate
L. Race
Toyota
112
-28 58
-51

15. Game Theory and Strategy
Lessons #1:
Commitment (sunk costs) can be used to achieve cooperation.
The importance of mutual economic hostages: The wise manager should think beyond Machiavelli’s myopic approach to contracting and should seek both to give and receive credible (sunk cost) commitments that facilitate ongoing relationships and adaptation.

16. Game Theory and Strategy
Initial Game (played simultaneously)
Airbus
No Launch
Launch
Boeing
400
300
200
-100
-200

17. How Can “Commitment” Affect A Competitor’s Response?
Commitment = An Irreversible Action (Sunk Costs)
Competition In The Commercial Aircraft Industry
Airbus
No Launch
Launch
Boeing
400
300
200
-100
-200

18. Game Theory and Strategy:
Lessons #2
2. Commitment (sunk costs) can be used to achieve competitive advantage.
Preemption strategy