Session 16: Wrap up 1. Strategic commitment (from Session 15). - - PowerPoint PPT Presentation

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Session 16: Wrap up 1. Strategic commitment (from Session 15). - - PowerPoint PPT Presentation

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Session 16: Wrap up 1. Strategic commitment (from Session 15). 2. Entry as a congestion game. 3. Wrap up. Session 16 Wrap up Slide 1 P1 SepOct 2012 Timothy Van Zandt Prices & Markets Part of An entry deterrance game

slide-1
SLIDE 1

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

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SLIDE 2

An entry deterrance game

Part of Exercise 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 )

High

  • utput

( 6 , 6 )

Low

  • utput

Sony Stay out ( 12 , 0 )

High

  • utput

( 8 , 0 )

Low

  • utput

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 2

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SLIDE 3

Suppose Sony is making plans to build a new plant

Sony JVC Large plant Sony Enter ( 4 , -2 )

High

  • utput

( 3 , 6 )

Low

  • utput

Sony Stay out ( 11 , 0 )

High

  • utput

( 5 , 0 )

Low

  • utput

JVC Small plant Sony Enter ( 5 , -2 )

High

  • utput

( 6 , 6 )

Low

  • utput

Sony Stay out ( 12 , 0 )

High

  • utput

( 8 , 0 )

Low

  • utput

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 3

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SLIDE 4

Pricing game from Session 12

Firm B Low Med High Low 19 20 18 25 10 33 Firm A Med 24 23 28 31 22 38 High 30 15 40 27 34 42

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 4

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SLIDE 5

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

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 5

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SLIDE 6

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.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 6

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SLIDE 7

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?

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 7

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SLIDE 8

Preemptive investments

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

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 8

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SLIDE 9

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.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 9

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SLIDE 10

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 10

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SLIDE 11

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.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 11

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SLIDE 12

Congestion games — simple version

Simplification: “How many” not “who”. Each player cares about how many other players are in, but not on their identities.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 12

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SLIDE 13

Example

Value of being in, excluding entry cost

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

Session 16 • Wrap up Slide 13

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SLIDE 14

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 14

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SLIDE 15

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.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 15

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SLIDE 16

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

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 16

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SLIDE 17

Imperfect competition

Perfect competition

Fixed firms in 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 has economic profit ≥ 0 . No potential entrant could make economic profit > 0 by entering.

Equilibrium

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 17

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SLIDE 18

Perfect competition

Imperfect competition

Fixed firms in market

MC = MR

⇓

P, Q Firms’ decisions Nash eqm. Equili- brium

Entry & exit

VΠ > FC? Firms’ decisions

Each active firm has economic profit ≥ 0 . No potential entrant could make economic profit > 0 by entering.

Equilibrium

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 18

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SLIDE 19

More economics by economists

  • Macroeconomics in Global Economy

(P3 core)

Interest rates, exchange rates, employment, …

  • 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)

Trade, globalization, environment, labor markets, …

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 19

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SLIDE 20

More microeconomics-related courses

  • Various finance courses

Including Corporate Financial Policy (P2 core)

  • Pricing Strategies and Tactics

(P5 elective)

More pricing!

  • 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

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 16 • Wrap up Slide 20