Session 16: Wrap up - INSEADfaculty.insead.edu/vanzandt/pm/Session16/Slides-16-P.pdf · Session 16:...

Session 16: Wrap up

1.➥ Strategic commitment (from Session 15).

2. Entry as a congestion game.

3. Wrap up.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Session 16 • Wrap up Slide 1

An entry deterrance game Part ofExercise 15.1

The figure below illustrates the following strategic situation involving Sony, which

currently has a monopoly in the Discman, and JVC, which may enter the market.

JVC

Sony

Enter

( 5 , -2 )

Highoutput

( 6 , 6 )

Lowoutput

Sony

Stay out

( 12 , 0 )

Highoutput

( 8 , 0 )

Lowoutput



Suppose Sony is making plans to build a new plant

Sony

JVC

Large plant

Sony

Enter

( 4 , -2 )

Highoutput

( 3 , 6 )

Lowoutput

Sony

Stay out

( 11 , 0 )

Highoutput

( 5 , 0 )

Lowoutput

JVC

Small plant

Sony

Enter

( 5 , -2 )

Highoutput

( 6 , 6 )

Lowoutput

Sony

Stay out

( 12 , 0 )

Highoutput

( 8 , 0 )

Lowoutput



Pricing game from Session 12

Firm BLow Med High

Low19

20

18

25

10

33

Firm A Med24

23

28

31

22

38

High30

15

40

27

34

42



Suppose that Firm B can commit to its price first

Firm B

Firm A ( 24 , 23 )

Low

( 19 , 20 )

Low

( 24 , 23 )

Med

( 30 , 15 )

High

( 28 , 31 ) Firm A

Med

( 18 , 25 )

Low

( 28 , 31 )

Med

( 40 , 27 )

High

( 34 , 42 ) Firm A

High

( 10 , 33 )

Low

( 22 , 38 )

Med

( 34 , 42 )

High



Summary: What are Stackelberg games?

From these ingredients:

two players: 1 and 2

player 1 chooses action A1 and player 2 chooses action A2

We can have three different strategic situations, depending on the timing:

Simultaneous moves

Sequential game in which player 1 moves first

Sequential game in which player 2 moves first

Such sequential games are called Stackelberg games.

Player who moves first is the leader; other player is the follower.



Summary: What about Stackelberg games?

They let us see how timing and strategic commmitment matter.

Who is behaving differently in Stackelberg vs. Nash?

Follower?

Leader?



Preemptive investments

Your firm is first to develop the next generation memory chip. You thus willbe the first firm to install capacity. What are you thinking?



Wrap up on strategic commitment

When you have the chance to commit, think about:

1. In what way you want to influence the other players’ actions.

2. How you can achieve this.



Session 16: Wrap up

1.✓ Strategic commitment (from Session 15).

2.➥ Entry as a congestion game.

3. Wrap up.



Congestion games

What do these situations have in common?

1. Entering a market.

2. Going to study at the INSEAD library.

3. Entering a random draw for free tickets to a concert.

4. Deciding whether to focus on the finance job market.



Congestion games — simple version

Simplification: “How many” not “who”.

Each player cares about how many other players are in,but not on their identities.



Example

Value of being in, excluding entry cost



Session 16: Wrap up

1.✓ Strategic commitment (from Session 15).

2.✓ Entry as a congestion game.

3.➥ Wrap up.



What is this course about?

Consumers Firms

Markets

Prices Quantities

Our focus is on Firms.

And the topics differ according to how we treat firms.



Main structure

(Sessions 1–6)

(Firms’ decisions& equilibrium)

Firms are price-takers(Perfect competition)

Firms have market power(Imperfect competition)

(Sessions 7–11)

Firms’decisions

(Sessions 12–15)

Equilibrium

In each case: fixed firms in the market, then entry/exit



Imperfect competition

Perfect competition

Fixed firmsin market

MC = MR = P⇓

s i (P)

Firms’decisions

s(P) = d(P)

Equili-brium

Entry& exit

VΠ > FC?

P > AC u ?

Firms’decisions

Each active firm haseconomic profit ≥ 0 .

No potential entrant could makeeconomic profit > 0 by entering.

Equilibrium



Perfect competition

Imperfect competition

Fixed firmsin market

MC = MR⇓

P, Q

Firms’decisions

Nash eqm.

Equili-brium

Entry& exit

VΠ > FC?

Firms’decisions

Each active firm haseconomic profit ≥ 0 .

No potential entrant could makeeconomic profit > 0 by entering.

Equilibrium



More economics by economists

• Macroeconomics in Global Economy (P3 core)

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• Advanced Game Theory (P4)

Applied, but for those who find rigorous modeling useful.

• Economics and Management of Developing Countries (P4 elective)

Title says it all.

• Business and Public Policy (P4 mini)

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More microeconomics-related courses

• Various finance coursesIncluding Corporate Financial Policy (P2 core)

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• Dynamic Pricing and Revenue Management (P5 elective)Pricing and screening, plus the complications of stochastic demand

• Industry and Competitive Analysis (P4 & P5 elective)Much more applied but similar frameworks as in P&M.

• Negotations (elective)Incomplete information, behavioral biases, commitment problems



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