11 A Appendix Monopolistic Competition and Oligopoly Mc

Additional Game Theory Applications • Game theory explains mutual • interdependence and strategic behavior

A One-Time Game: Strategies • A one-time game • A simultaneous game • A

A One-Time Game: Strategies • Nash Equilibrium • Outcome from which neither firm wants

A One-Time Game Dramco’s Price Strategy LO 8 International A National International Chipco’s Price

Credible and Empty Threats • Credible Threats • A statement of coercion that is

Repeated Games • Game that recurs • May cooperate and not compete • •

LO 8 Thirst. Q’s Advertising Strategy Promo Budget Normal Budget A $10 B $10

First-Mover Advantages • The firm that first moves: • May be better prepared •

First-Mover Advantages Big Box strategies LO 8 Build A Don’t build Huge Box strategies

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Additional Game Theory Applications • Game theory explains mutual • interdependence and strategic behavior Collusion is beneficial to participants • Reduced uncertainty • Increased profits • May block entry LO 8 11 -2

A One-Time Game: Strategies • A one-time game • A simultaneous game • A positive sum game • A firm’s dominant strategy LO 8 11 -3

A One-Time Game: Strategies • Nash Equilibrium • Outcome from which neither firm wants to deviate • Current strategy viewed as optimal • Stable and persistent outcome LO 8 11 -4

A One-Time Game Dramco’s Price Strategy LO 8 International A National International Chipco’s Price Strategy • 2 competitors • 2 price strategies • Each strategy has a payoff matrix • Independent actions stimulate a response C $11 National B $11 $5 $5 $20 D $17 11 -5

Credible and Empty Threats • Credible Threats • A statement of coercion that is believable by the other firm • Can establish collusive agreements • A strong enforcer can prevent cheating • Can generate higher profits • May be countered with threat by rival • Empty Threats • A threat that is not believable by rival LO 8 11 -6

Repeated Games • Game that recurs • May cooperate and not compete • • LO 8 strongly Rival reciprocates Examples: Pepsi and Coke, Walmart and Target, Boeing and Airbus 11 -7

LO 8 Thirst. Q’s Advertising Strategy Promo Budget Normal Budget A $10 B $10 C $8 $8 $16 D $12 Normal Budget Promo Budget Thirst. Q’s Advertising Strategy 2 Cool’s Advertising Strategy Normal Budget Promo Budget 2 Cool’s Advertising Strategy Repeated Games A $11 B $11 C $10 $14 $15 D $13 11 -8

First-Mover Advantages • The firm that first moves: • May be better prepared • May preempt entry of rival • Rival must respond LO 8 11 -9

First-Mover Advantages Big Box strategies LO 8 Build A Don’t build Huge Box strategies Build Don’t build -$5 B -$5 C $0 $0 $12 D $0 $0 11 -10