ECN601_Topic5 Discussion1

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Kimberly Wilson ECN601- Topic 5 Discussion 1 May 24, 2024 The order of play tends to matter in sequential games where rivals must predict best reply-responses and counter-responses in order to achieve a desired payoff. Discuss an instance in which you or your firm used game theory and explain why the relationship between the players was a strategic one. Did the use of a credible threat or commitment affect the outcome? Were there any first-mover of fast- second strategies used? Game theory is a mathematical model of strategic interaction among rational decision-makers. It has applications in all fields of social science, as well as in logic, systems science, and computer science. In business, it can be used to model competition and cooperation between firms. According to Froeb et al., (2018), used where the profit of one firm depends critically on the actions of others. Will give your insight on not just where the competitor is likely to lead, but also how to change the rules of the game to your advantage. Not forgetting to compute the equilibrium as well. I once worked for a firm that was in a duopoly situation with another firm. We were both planning to launch a new product on the market. The success of our product depended on the timing of the launch and the pricing strategy. This is a classic example of a sequential game in game theory. The relationship between our firm and the rival firm was strategic because our actions would affect the other's payoff and vice versa. If we launched our product first, we could capture the market, but if our price was too high, the rival firm could undercut us and take the market. Conversely, if we waited for the rival firm to launch their product first, we could set our price based on theirs. Our firm made a credible commitment by announcing our product launch date and price in advance. This was a strategic move to deter the rival firm from launching their product before us or setting a lower price. The rival firm, in response, made a credible threat by announcing they would match any price we set. This created a situation of mutual deterrence, where neither firm wanted to deviate from their announced strategy. In this situation, our firm used a first-mover strategy to launch our product first. This allowed us to set the market price and capture the early adopters. The rival firm, on the other hand, used a fast-second strategy. They waited for us to reveal our price, then set their price slightly lower to attract price-sensitive customers.

Strategy Our Firm Rival Firm Launching Time First Second Pricing Market Price Slightly Lower In conclusion, game theory provides a useful framework for understanding strategic interactions in business. The order of play, credible threats and commitments, and first-mover or fast-second strategies can all significantly affect the outcome of the game. References: Froeb, L., McCann, B.T., Shor, M., & Ward. M.R. (2018). MindTap for Managerial economics: A problem solving approach (5th ed.). Cengage Learning. ISBN-13: 9781337106580

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