In this six-module course, you will learn how businesses and organizations behave in situations in which strategic decisions are interdependent, i.e. where my actions affect my competitors' profits and vice versa. Using the basic tools of game theory, we will analyse how businesses choose strategies to attain competitive advantage. This course is also available in Chinese. Please go to our course catalog to access the Chinese version of Competitive Strategy.
Finite Repetition
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来自 Ludwig-Maximilians-Universität München (LMU) 的课程
竞争策略
1612 个评分
Ludwig-Maximilians-Universität München (LMU)
1612 个评分
课程 1（共 4 门，Specialization Competitive Strategy and Organization Design）
从本节课中
Why Firms Work Together
According to economic theory, companies compete with each other in the marketplace. In reality, they are often friendly and cooperate with each other. In this module, we attempt to understand this strategy, and why it is good for the organizations involved. With this, we evaluate the factors that encourage or hinder cooperation and apply them in different examples.
与讲师见面
Tobias KretschmerProfessor
Institute for Strategy, Technology and Organization
Great to have you here.
As we've learned already, companies are players.
They're not necessarily happy about the equilibrium in the prisoner's dilemma.
So in a prisoner's dilemma kind of situation, they could increase their
joint profits if they would somehow be able to
coordinate their behavior. However as we've seen in in the previous
session, a coordination is not easy to establish and maintain.
So in this and the subsequent videos, we'll have a look, and analyze games that
are played repeatedly, and we will ask how repetition can support
coordination. Okay, so what do we mean by repeated
games. Repeated games basically take into
account the fact that interactions between two players, between multiple
players, can take place not only once but a repeated number of times.
So before we even get started at the very beginning, we would like you to think
about some real life examples of games. So which of these are one off games, and
which are played repeatedly. Just have a look at the at the couple of
games that are going to follow, and I'll see you after this brief quiz.
Okay, so as we've seen sometimes interactions just take place a couple of
times in a row. And the way in which that changes the
dynamics of the game or that changes the dynamics of
competition between two players is by making the future matter.
So, for once for example A, player A, if we have a game between A and B, player A
can threaten player B or vice versa. So if A does not behave cooperatively
this time, in one instance of the game, then B will retaliate the next time.
And of course, the other way around, okay?
So that would be a possibility in which playing a game multiple times changes the
outcome of the game. But what we're going to do is we're going
to take a very analytical look at this and see if this kind of threat can
effectively enforce cooperation. And to do that we have to distinguish
between two different types of repetitions.
First one's finite repetition, where it's clear from the beginning how often the
game is going to be repeated and when the game ends, okay?
So we simply know what the outcome or what the end point of the game
is. And once we have the end point, then
we're going to work towards this end point.
If we have infinite repetition, then there's no defined end to the game, the
number of repetitions is unclear, and we can therefore never tell if one round is
the last round of a particular game. And let's take one particular example of
a finite repetition game. And that's the installation of street
lights for the Olympics. This is the 2012 Olympics in London and
we had a situation, well and this was a situation that of course
was repeated in lots of different ways and lots of different small
settings, but, we had a situation where an organizing committee had to order
500 street lights from a contractor. And that contractor was supposed to
install them time over time leading up to the Olympics.
Why is this a finite game? It's a finite game because the Olympics
will start at a certain date and by that date the streetlights have to be
installed. After that, there's no future, if you
wish. So the contractor manufactures the street
lights and installs them in the Olympic park.
And he's capacity constrained so that every month only 100 street
lights can be manufactured and installed. This means that the overall process of
installing 500 lights will take five months, okay, and we can think of this as
a game that's repeated five times. Alright it's the same game
over 100 street lights just playing it five times and its over after these,
after the fifth iteration. So one month before the olympic start all
street lights will have to be installed. So we're going to take this into a
game setting, and keep in mind that whenever we put up the numbers these are
fictitious numbers, and not necessarily reflective of reality.
So what are the actions that our two players can take?
Alright, so we have the contractor and the organizing committee.
So every month, the contractor has to decide about delivery.
And he can choose between installing high quality streetlights.
They're worth 45,000 and they cost 15,000 or installing low quality streetlights.
They're worth 30,000 and they cost 12,000 pounds.
The organizing committee, will also have two strategies at their disposal.
They can decide if they want to pay the agreed price of 30,000.
So that's the price that they initially had agreed with the contractor, or if they
negotiate the price down to 20,000. Now what do we mean by
renegotiating the price? It's about basically finding some small
fault or some slightly late delivery, something that isn't entirely up to
specifications that you can either let go or you can decide to play hard ball about
it and lower prices in form of a penalty, of a contractual penalty
from 30,000 to 20,000. Okay, so these are the two strategies
each for the contractor and the organizing committee.
So every month our game will look a bit like this. We have the contractor choosing
between high and low quality, and we have the organizing committee choosing to pay
the agreed price or to renegotiate the price.
So, what's going to happen in each of these instances?
So, if the contractor delivers high quality, and the organizing committee
pays the price of 30,000. Delivering high quality, means, it's
worth 45,000, so if the organizing committee pays 30,000, then what's left
for the organizing committee is a value of 15,000.
If the cost for the contractor are 15,000 and he is paid 30,000 then that's going
to leave him with a surplus of 15,000. Okay, and by the same token if the
contractor delivers high quality, and the organizing committee simply pays a lower
price then the payoff for the contractor is
going to be 5,000, the payoff for the organizing committee
is going to be 25, because they negotiated the price down to 20,000,
which leaves them with 25,000. Contractor delivering low quality and the
organizing committee paying full price means that there's no surplus left for
the organizing committee and the contractor gets 18,000.
And if the contractor delivers low quality and the organizing committee
renegotiates the price. Then, profits are going to be
8,000 for the contractor and surplus is going to be 10,000 for the organizing
committee. So, as you can imagine the fairest or
the most sensible outcome for this game would be if the organizing committee
paid the full price, and the contractor delivered high quality.
But you can also see that there's an incentive for both of them to actually
not stick to that agreement. So keep in mind that we play this game 5
times. So one thing that might help is the
threat of doing something in the future if the
other party does not behave according to the rules.
So the contractor, for example, could threaten the organizing committee and
say, well, if you ever renegotiate the price in a given month, then we will
continue delivering low quality from there onwards.
The threat on the part of the organizing committee would be well if you the
contractor ever deliver low quality in one month then we will renegotiate the
price in all subsequent months. Okay, and so the question we're asking
here is, if this is going to be helpful in enforcing cooperative behavior.
Just having outlined the situation, what we're going to do in the next video,
is we're going to look at these these threats, and at the effectiveness
of this threats to enforce cooperation. So stay tuned and see you in a minute.
