Game Theory-Sequential Games are Played in Business All the Time.
So what is Game Theory and how do businesses uses games?
In the text, we consider a sequential-move game in which an entrant is considering entering an industry in competition with an incumbent firm (See Figure 15-1). There are several possibilities of how this sequential game will be played. We want to use the Froeb rule of look ahead and reason back. Can and how does the entrant succeed? Is the incumbent ever in control of this game? Hint, the game is the Duopoly game explained in the video on this week’s page.
PLEASE DO NOT RELY ON WIKIPEDIA, INVESTOPEDIA OR ANY OTHER PEDIA AS A REFERENCE AT ANYTIME IN THIS COURSE.
Response from one of my peers
Week 6 Discussion Board
In the text, we considered a sequential-move game in which an entrant was considering entering an industry in competition with an incumbent firm (Figure 15-1). Consider now that the entrant, if fought, has the possibility of withdrawing from the industry (at a loss of 1 for the entrant and a gain of 8 for the incumbent), or staying (at a loss of 5 for each player). What is the equilibrium of this game? Discuss if the entrant is better off with or without the ability to withdraw.
In my opinion the entrant is better without the option to withdraw. The equilibrium game is designed to use prediction to make the best decision for each person playing. They make a decision on what the other opponent will do and this will then guide the entrants decision. With equilibrium you companies can predict how to respond to competitors. If the incumbent firm knows there is an option to withdraw they will fight thus forcing the new entrant to withdraw while taking a loss. The new entrant should also be aware that with this option the incumbent firm will fight and they may experience losses. Knowing this information, it will be better for the new entrant not to enter the market at all. However, to refer back to the question at hand. If they enter the market it is better not to have the option to withdraw.