Strategic management Essay Example | Topics and Well Written Essays - 1500 words - 1

Strategic management - Essay Example This is because every finite extensive form game contains at least a sub-game perfect equilibrium. For example, by applying backward induction it can be proved that the strategy combination comprising of the Nash-equilibrium contours of all sub-games is apparently sub-game perfect. c) Yes, after iterated elimination of dominated strategies in two player games and only one strategy survives, then the strategy combination must be a Nash-equilibrium. This is because the strategies match up to rationalizable strategies. Indeed, no pure strategy that is persistently strongly dominated can comprise of a Nash-equilibrium. Non-recursively weakly dominated strategies can comprise of a Nash-equilibrium and so the iterated elimination may remove one or more Nash equilibria. It can then be shown that one Nash-equilibrium will survive the iterated elimination of weakly dominated strategies. Question two a) Extensive form of the game Rating profits on a scale of 100 for best, payoff for the incumb ent are 100 if the entrant fails to enter, 50 if he enters and shares the market and 0 if he enters and the incumbent starts a price war. The entrant payoffs are 0 if he does not enter, 40 (profit – entry cost) if he enters and -10 if there is a price war. The game can be presented in an extensive form as illustrated below: War (-10, 0) Enter No (40, 50) No (0, 100) In the figure, the entrant’s choice is indicated at node 1 and the incumbent’s choice is indicated at node 2. The numbers at the right side indicates the payoffs with entrant’s payoff first. Therefore, the entrant will need to think strategically or to anticipate how the incumbent responds if he decides to enter. Normal form of the game In normal form of the game incumbent strategies are contingent strategies: If the entrant enters then accommodate and if he enters then initiate price war. The entrant’s strategies are enter and do not enter. The game in normal form is indicated below: I ncumbent If the entrant enters, then accommodate: if the entrant does not enter, continue with the usual business If the entrant enters, then initiate prices war; if the entrant does not enter continues with the usual business. Entrant Enter 40, 50 -10, 0 Do not 0,100 0,100 b) Pure strategy Nash equilibrium Incumbent If the entrant enters, then accommodate: if the entrant does not enter, continue with the usual business If the entrant enters, then initiate prices war; if the entrant does not enter continues with the usual business. Entrant Enter 40, 50 -10, 0 Do not 0,100 0,100 Enter and accommodate is a pure-strategy Nash equilibrium. c) The sub-game perfect outcome is the Nash equilibrium in the simultaneous move game, which is (no entry, business as usual). Question three Due to Nash equilibrium, pricing strategies that appear to be super-competitive can in fact be anticompetitive. The market strategies for all players respond to the Nash equilibrium. This is best explained by an example. Suppose that the monopoly price for gaming consoles is $200. Now suppose firm A advertises that if a consumer buys a console from him at $200 and discovers that he/she can buy it cheaper at B, A will refund the full purchase price. Again suppose that B does the same thing. It can then be shown that it is Nash for both firms to charge $200. Question four Glaxo and EMI developed important innovations in the 70s, but succeeded