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Managerial Economics and Organizational Architecture by James Brickley 6th Edition-Text Bank

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  • ISBN-10 ‏ : ‎ 0073523143
  • ISBN-13 ‏ : ‎ 978-0073523149

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Managerial Economics and Organizational Architecture by James Brickley 6th Edition-Text Bank

Chapter 09
Economics of Strategy: Game Theory

Essay Questions

1. Refer to Figure 9.1. GMB and VolgaBus compete to sell 100 buses to MetroTravel, a city-owned bus company. If sealed bids are required and no illegal activities occur, what will be the outcome? Explain the process.

Answer: The Nash Equilibrium in this game is for both firms to charge low prices. Charging a low price is the best response for each firm to the other firm’s best strategy. Neither firm would want to unilaterally change strategies. With low bids, both firms will earn $750,000.

Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Topic: Simultaneous-Move, Nonrepeated Interaction

 

2. Refer to Figure 9.2. What is the Nash equilibrium of this pricing game?

Answer: The only Nash equilibrium in this game is for General Electric to set a price of $2,000 and Westinghouse to set a price of $2,000.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Simultaneous-Move, Nonrepeated Interaction

3. You toss two coins and if heads or tails shows up, then I take $1. If only one heads shows up, then you give me $1. We play this game many times. Who comes up ahead at the end of the day?

Answer: No one. Since the probability of 2 heads = probability of 2 tails = probability of only 1 head, our expected payoff is 0.5 (+1) + 0.5 (−1) = 0.

Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Topic: Simultaneous-Move, Nonrepeated Interaction

4. What are the key managerial insights derived from game theory? Which one is the most important?

Answer: The key managerial insights that can be derived from game theory include taking advantage of a first-mover advantage and understanding that repetition facilitates cooperation. The behavior of agents can be predicted by knowing the elements of the game: the identity of rivals, the rules of interaction in the game, and the payoffs from actions. The most important of these is the ability to predict the behavior of agents. As a manager, you can make better decisions if you place yourself in the role of a rival in order to anticipate the rival’s best response to your actions. Then, use backward induction to choose the most profitable action anticipating the response of your rivals.

Difficulty: 01 Easy
Blooms: Remember
AACSB: Reflective Thinking
Topic: Simultaneous-Move, Nonrepeated Interaction

5. Refer to Figure 9.4. The payoffs to each firm (in billions of dollars) and an extensive form game between BP and Shell are shown in the figure. BP has 20 percent of the U.S. gasoline market share and Shell has 16 percent market share. BP and Shell are attempting to determine whether to send geologists to explore Oil Track 20.

 

(a) Is there a dominant strategy for Shell? What is the dominant strategy, if any, for Shell?
(b) What is the Nash equilibrium or equilibria in this game?
(c) What is a first-mover advantage? Does BP have a first-mover advantage in this game?
(d) Use the above information to advise BP on whether they should pursue a merger with Shell.

Answer: (a) Shell’s dominant strategy is to explore Oil Track 20 because their payoffs are larger with this strategy than with no exploration.
(b) The Nash equilibrium in the game is for Shell to explore Oil Track 20, and for BP to also explore Oil Track 20.
(c) A first-mover advantage is a situation in a game where the first agent to take an action has a strategic advantage over its rivals. No, BP does not have a first-mover advantage.
(d) Yes, they could consider a merger because a merged firm could have higher profits ($8 = $2 + $6) than the combined profits from the above Nash equilibrium ($3 = $1 + $2).

Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Topic: Sequential Interactions

6. A and B are going to play a game twice. During both repetitions, if they both select a low price or a high price, their market share stays the same. But if one selects a low price while the other selects a high price, then the one with the low price gets more money while the one with the high price loses some market share. Based on this information, what is the most likely outcome in both periods?
Answer: Start with the second period. If you are A, you will select a low price because that is the best you can do. Knowing this, B will also select a low price. Now you know that B will select a low price in the second period and the game ends there. So, in the first period, you can do no better than select a low price. Knowing this, B will also select a low price. Hence, in both the periods, both the firms will select a low price.
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Topic: Repeated Strategic Interaction

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