Industrial Organziation game - Business Strategy & Game theory Consider a game with competitive for market-share in a large region (a country or city). Firm 1 initially makes a decision to either compete in the Eastern (E) or Western (W) part of a region, or to opt out entirely (O). Once this decision has been made, Firm 1 and Firm 2 (who is already present in the region) simultaneously make a decision to be aggressive (A) or passive (P) in the region. Denote actions in the Eastern region without a prime (i.e. A and P) and those in the Western region with a prime (i.e. A` and P`). We'll make the following assumptions about these firms - If Firm 1 opts out, its payoff is 8 and the payoff for Firm 2 is 12 If Firm 1 ENTERS the Eastern region both firms receive 9 if both are AGGRESSIVE both firms receive 6 if both are PASSIVE if one plays AGGRESSIVE and the other plays PASSIVE, the aggresive firm gets 5 and the passive firm gets 2 If Firm 1 ENTERS the Western region both firms receive 2 if both are AGGRESSIVE both firms receive 7 if both are PASSIVE if one plays AGGRESSIVE and the other plays PASSIVE, the aggressive firm gets 10 and the passive firm gets 8 ** Write out the EXTENSIVE form of this game*

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter15: Strategic Games

Section: Chapter Questions

Problem 3MC

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Industrial Organziation game - Business Strategy & Game theory

Consider a game with competitive for market-share in a large region (a country or city).

Firm 1 initially makes a decision to either compete in the Eastern (E) or Western (W) part of a region, or to opt out entirely (O).

Once this decision has been made, Firm 1 and Firm 2 (who is already present in the region) simultaneously make a decision to be aggressive (A) or passive (P) in the region. Denote actions in the Eastern region without a prime (i.e. A and P) and those in the Western region with a prime (i.e. A` and P`).

We'll make the following assumptions about these firms -

If Firm 1 opts out, its payoff is 8 and the payoff for Firm 2 is 12

If Firm 1 ENTERS the Eastern region

both firms receive 9 if both are AGGRESSIVE
both firms receive 6 if both are PASSIVE
if one plays AGGRESSIVE and the other plays PASSIVE, the aggresive firm gets 5 and the passive firm gets 2

If Firm 1 ENTERS the Western region

both firms receive 2 if both are AGGRESSIVE
both firms receive 7 if both are PASSIVE
if one plays AGGRESSIVE and the other plays PASSIVE, the aggressive firm gets 10 and the passive firm gets 8

****** Write out the EXTENSIVE form of this game*****

Definition Definition Economic decision-making framework that analyzes how different players optimize their outcomes with given pay-offs corresponding to their available strategies. The assumptions of game theory are: The number of players or competitors are finite/limited; All participants are rational The rules of the game are known to every player; and Each participant has a finite set of actions. A common way in which game theory is presented as an ( m x n ) matrix in which m represents the strategies of row player and n represents the strategies of column player. There are several limitations of game theory: Many businesses have a large number of competitors, and selecting an optimal strategy in these circumstances is difficult; Real-life business operating environments are full of uncertainty and difficult to model as a game theory; and The assumption of rationality and utility maximization isn't always an accurate portrayal of human nature.

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