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Chapter 13 - Strategic decision making in oligopoly markets. This chapter introduced you to game theory, an indispensable tool for thinking about strategic decision making. We focused on three types of strategic decision situations: (1) simultaneous decisions, in which managers make their individual decisions without knowing the decisions of their rivals; (2) sequential decisions, in which one manager makes a decision before the other; and (3) repeated decisions, in which strategic decisions are made repeatedly over time by the same firms. | Chapter 13: Strategic Decision Making in Oligopoly Markets McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Oligopoly Markets Interdependence of firms’ profits Distinguishing feature of oligopoly Arises when number of firms in market is small enough that every firms’ price & output decisions affect demand & marginal revenue conditions of every other firm in market Strategic Decisions Strategic behavior Actions taken by firms to plan for & react to competition from rival firms Game theory Useful guidelines on behavior for strategic situations involving interdependence Simultaneous Decisions Occur when managers must make individual decisions without knowing their rivals’ decisions Dominant Strategies Always provide best outcome no matter what decisions rivals make When one exists, the rational decision maker always follows its dominant strategy Predict rivals will follow their dominant strategies, if they exist Dominant strategy . | Chapter 13: Strategic Decision Making in Oligopoly Markets McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Oligopoly Markets Interdependence of firms’ profits Distinguishing feature of oligopoly Arises when number of firms in market is small enough that every firms’ price & output decisions affect demand & marginal revenue conditions of every other firm in market Strategic Decisions Strategic behavior Actions taken by firms to plan for & react to competition from rival firms Game theory Useful guidelines on behavior for strategic situations involving interdependence Simultaneous Decisions Occur when managers must make individual decisions without knowing their rivals’ decisions Dominant Strategies Always provide best outcome no matter what decisions rivals make When one exists, the rational decision maker always follows its dominant strategy Predict rivals will follow their dominant strategies, if they exist Dominant strategy equilibrium Exists when when all decision makers have dominant strategies Prisoners’ Dilemma All rivals have dominant strategies In dominant strategy equilibrium, all are worse off than if they had cooperated in making their decisions Bill Don’t confess Confess Jane Don’t confess A 2 years, 2 years B 12 years, 1 year Confess C 1 year, 12 years D 6 years, 6 years Prisoners’ Dilemma (Table 13.1) J J B B Dominated Strategies Never the best strategy, so never would be chosen & should be eliminated Successive elimination of dominated strategies should continue until none remain Search for dominant strategies first, then dominated strategies When neither form of strategic dominance exists, employ a different concept for making simultaneous decisions Successive Elimination of Dominated Strategies (Table 13.3) Palace’s price High ($10) Medium ($8) Low ($6) Castle’s price High ($10) A $1,000, $1,000 B $900, $1,100 C $500, $1,200 Medium ($8) D $1,100, $400 E $800, $800 F $450, $500 Low .
