Edited Invalid date
14 -- Part 3: The Demand and Supply of Resources
The dominant strategy in the payoff matrix is to decide which boat to blow up.
Failing to participate in the experiment.
Either the ferry blows the scene as a game theorist will give you a new up at midnight or the other boat will blow it up first.
Some games do not involve simultaneous decisions.
Sometimes one player has to move first and the other has to respond.
The process of deducing theory is the process of backward from the end of a scenario to infer a sequence of optimal actions.
The payoff matrix at the end of a scenario summarizes the payoffs of a noncooperative game.
It is not possible to predict what the final outcome will be because neither of them has a dominant strategy.
The game is predictable if we let one player go first.
Let's imagine that the first choice is Azalea and the second choice is Iggy.
The first player can limit the set of outcomes to one game.
If she agrees, she must choose between making $20,000 or $75,000 and must work off the lower left set of branches.
Iggy chooses to disagree.
In this case, the final outcome is between $50,000 and $75,000.
The payoffs on the lower right side of the decision tree would be faced by Iggy if she chose Disagree to start.
If she agrees, she will get $50,000 and if she disagrees, she will get $25,000.
The final outcome is between $50,000 and $35,000 for the two.
Knowing that Iggy will disagree, Sequential Game will agree.
There is a game that guarantees $50,000 and $75,000.
She can use this knowledge to earn $50,000 for herself by agreeing with the full knowledge that she will choose Disagree.
There are many examples of sequential games.
Chess and check ers are two popular board games.
It becomes easier to predict future decisions once a particular path is taken, as many business decisions are sequential in nature.
It is easier for a firm to predict how a rival will react when they look at the remaining choices on a decision tree.
Game theory can be used to make decisions, but not all games have the same strategies.
The game known as rock- paper- scissors is a good example.
This simple game has no dominant strategy: paper beats rock because the paper will cover the rock, and scissors beats paper because the scissors will cut the paper.
The preferred choice is determined by what the other player chooses.
Life and business are more similar to rock- paper- scissors than the prisoner's dilemma.
Winning at business in the long run often occurs because you are one step ahead of the competition, not because you deploy a strategy that attempts to take advantage of a short- run opportunity.
Consider two friends who play racquetball together.
Each point is determined by whether the players guess correctly about the direction the other player will hit.
Figure 13.6 is a game of rock- paper- scissors.
The success of Joey and Rachel depends on how well each one does.
There are only two sandwich shops in a small college town.
Their profits fall to $1,000 when they run promotions.
University Subs will make between $1,000 and $15,000 if it runs the 2- for- 1 promotion.
If University Subs keeps the price high, it will either lose money or make money.
A 2- for- 1 promotion is suppose to be run by Savory Sandwiches.
The University Subs's best response is to run a 2- for- 1 promotion.
Imagine that the strategy of keeping the price high is used by Savory Subs.
The 2- for- 1 promotion is the best response.
University Subs's best response is to run a 2- for-1 promotion.
The same strategy and payoffs can be found in Savory Sandwiches.
Both companies will make $1,000 from the promotion.
If the other company runs a 2- for- 1 promotion, neither firm will switch to the high- price strategy.
Both companies run a promotion.
Rachel lost the point.
Joey loses the no Nash equilibrium.
Rachel and Joey don't have a dominant strategy that guarantees success.
Sometimes he wins when hitting to the right and other times he loses the point.
Sometimes Rachel wins when she guesses to the left and other times she loses.
Half the time, each player guesses correctly.
There is no Nash equilibrium because we can't say what each player will do.
There is no way to predict how the next point will be played, as any of the four outcomes are equally likely on successive points.
We can't expect every game to include a prisoner's dilemma and produce a Nash equilibrium.
Like real life, game theory has many different outcomes.
When an industry forms a cooperative alliance, it becomes a monopoly.
Competition is not good for society.
Policy legislation can help improve the social welfare of society by restoring competition and limiting monopoly practices.
The Sherman Act was the first federal increase in concentration ratios in leading U.S. industries.
Some actions became criminal after the act took effect.
Large corporations were vilified during the presidential election of 1912, and the Sherman Act was seen as largely ineffective in curtailing monop that reduce competition.
The Clayton Act was added to the list of activities that were deemed socially detrimental.
Lawmakers have refined anti trust policy over the past hundred years.
It is difficult to determine if a company has violated the law because of additional legislation and court interpretations.
The U.S. Justice Department lacks the resources to fully investigate every case.
These laws are essential to maintain a competitive business environment, even though cases are hard to prosecute.
Firms would find other ways to restrict competition if there were not effective restrictions on market power.
The most influential antitrust cases in history are described in Table 13.5.
Firms have a strong incentive to cooperate in order to keep prices high, but they also want to keep potential rivals out of the market.
In order to prevent rivals from entering the market or to drive rival firms out of business in the long run, the firm suffers a short run loss that is below average.
The firm should be able to market once the rivals are gone.
It is difficult to prosecute predatory pricing.
The court system and economists don't have a simple rule to determine when a firm steps over the line.
Pricing can look and feel spirited.
Standard Oil was founded in 1870.
The company drove the price of oil down to 6 cents a gallon in 1897, putting many of its competitors out of business.
Standard Oil became the largest company in the world.
Standard Oil was sued by the U.S. government for violating the Sherman Antitrust Act.
After three years, the company was found guilty and had to break up.
The only producer of aluminum in the United States for many years was founded in 1907 by the Aluminum Company of America.
The company gained exclusive rights to all U.S. sources of bauxite, the base material from which aluminum is refined.
In the United States and Canada, it acquired land rights to build and own hydroelectric facilities.
ALCOA prevented other firms from entering the U.S. aluminum market by owning both the base materials and the only sites where refining could take place.
The Department of Justice filed a suit against ALCOA.
The Supreme Court ruled that ALCOA was a monopoly after seven years.
ALCOA was not broken apart because of the emergence of Kaiser and reynolds.
AT&T was sued by the U.S. Attorney General for violating antitrust laws.
Seven years passed before a settlement was reached to split the company into seven new companies.
AT&T Incorporated is now one of the largest companies in the world after five of the seven merged.
Internet Explorer has been replaced by other browsers.
The European Union is investigating whether or not the dominant market share of a search engine is used to gain an unfair advantage over competitors.
In 2015, the search engine of choice in Europe was Google.
The regulators have focused on accusations that search results divert traffic away from search results that favor its rivals and toward results that favor its own products.
Evidence that the firm's prices increased after its rivals failed is needed to prove predatory pricing.
Walmart is often seen as a predatory firm that engages in pricing because it drives many smaller companies out of business.
There is no evidence that Walmart raised prices after a rival failed.
It does not meet the legal standard for predatory pricing.
In the 1990s, Microsoft came under intense scrutiny for giving away its browser, Internet Explorer, in order to compete with Netscape.
At some point, you've experienced a price war.
Two gas stations, clothing outlets, or restaurants are charging unbelievably low prices.
Evidence of the intent to raise prices after others are driven out of business is an essential element for proving predatory pricing.
That is a problem in the example.
Check out the closings.
Efforts to maintain high prices for a long time will fail because barriers to entry are low in most metropolitan areas.
Customers will vote with their feet and wallet by choosing another pizza place a little farther away that offers a better value.
A new pizza parlor will open nearby if the victor is vulnerable because of the high prices.
The market is very competitive and any market power created by driving out one rival will be fleeting.
The price war is not predatory.
It's probably just promotional pricing to protect market share.
Firms often lower their prices to attract customers.
These firms hope to make up the difference with high profit margins on other items, such as beverages and side dishes.
The company gained over 80% of the browser market and was able to keep its leadership with the Windows operating system thanks to thebundling of Internet Explorer with Microsoft Office.
The government did not prosecute Microsoft for predatory pricing because Microsoft never raised the price of Internet Explorer.
The government prosecuted Microsoft for tying the purchase of Internet Explorer to the Windows operating system in order to restrict competition.
The Microsoft case lasted over four years, and it ended in a settlement because Walmart keeps its prices low.
Firms with a lot of customers find it easier to use good influences to attract new customers and keep their regular customers from changing.
In the early days of social networking, MySpace had more users than Facebook.
MySpace was slow to respond to the threat, while Facebook built a better social network.
It was too late for MySpace to respond, as Facebook was already on its way.
Facebook is the dominant social networking platform.
The sheer size of Facebook makes it a better place to do social networking than other sites.
Even though Facebook now has a lot of network externalities, it must be careful not to end up like MySpace.
New technolo gies are involved in most network externalities.
Some technologies need to reach a critical mass before consumers can use them.
Everyone seems to have a cell phone.
Cell phones were introduced in the United States in 1983.
The first users were unable to use the internet, text, or use many of the applications we enjoy today.
The phones were large and heavy.
The expansion of networks brought about when a consumer changes from one supplier to more users, and the new adopters benefited from the steadily expanding another.
Review flashcards and saved quizzes
Getting your flashcards
You're all caught up!
Looks like there aren't any notifications for you to check up on. Come back when you see a red dot on the bell!
Privacy & Terms