MBA 211

Game Theory

Spring 2012

Professor John Morgan morgan@haas.berkeley.edu

665 Faculty Building faculty.haas.berkeley.edu/rjmorgan

510.642.2669 Office hours: By appointment

Monday and Wednesday
11:00 AM -12:30 PM

C125

Game Theory Blog

Mid-Semester Topics Clearinghouse

Final Project Topics Clearinghouse

Game Theory Profit and Loss Scoreboard

Course Outline

Below is an outline of the course that roughly corresponds to each class session. It is important to emphasize that the outline is subject to change based on demand, timing differences, etc. Links will become live close to the time of each class.

Key: DN = Dixit and Nalebuff, C = Case reading from study.net, G= Gibbons, R. Game Theory for Applied Economists (optional text)

Avinash K. Dixit and Barry J. Nalebuff, The Art of Strategy: A Game Theorist's Guide to Success in Business and Life, ISBN-10 0393337170

1. Course Overview (1/18/12)

Reading: Course overview (slides), DN Ch. 1

Take aways: Overview of game theory; goals of the course; lens through which to view strategy

2. Rights of First Refusal (1/23/12)

Reading: NBA Free Agency (experiment), C Games of Strategy: An Introduction, pp. 1-5

Assignment: Problem set 1 (due before class 6)

Take aways: Fundamental principle of game theory: look forward, reason back; game theoretic versus “normal” options

3. Look Forward, Reason Back (1/25/12)

Reading: DN Ch. 2, Coors in the 1970s (caselet), Look forward, reason back (slides)

Take aways: Recipe for analyzing strategic situations

4. Timing is Crucial (1/30/12)

Reading: The Gaming of Pharmaceutical Patents (handout), McCain-Schumer (experiment) , McCain-Schumer Results

Take aways: Timing in games; the strategy of (non)disclosure

5. Timing in Games (2/1/12)

Reading: DN Ch. 4, G Ch. 1, C Games of Strategy: An Introduction, pp. 6-8, C Game Theory and Business Strategy

Take aways: Nash equilibrium

6. Archetypal Strategic Situations (2/6/12)

Reading: Games with Simultaneous Moves (slides)

Assignment: Problem set 2 (due before class 10). PS 2 consists of the questions at the back of the McCain-Schumer experiment

Take Aways: Archetypal strategic situations with simultaneous moves; links between competitive strategy and game theory

7. Spectrum Auctions (2/8/12)

Reading: C Games of Strategy: An Introduction, pp. 8-12, Auctioning the Spectrum (experiment), Results

Take Aways: Dominant strategies, Vickrey auctions

8. Prisoners Dilemmas and Free-Rider Problems (2/13/12)

Reading: DN Ch. 3, pp. 64-71, Dominance (slides)

Take aways: Archetypal strategic situations with dominant strategies; “solving” social dilemmas

9. Building Mental Models (2/15/12)

Reading: C Competitor Analysis: Anticipating Competitive Actions

Take aways: Competition framework, behavioral analysis, competitor analysis

10. OPEC (2/22/12)

Reading: DN Ch. 6, OPEC (experiment), OPEC Data

Assignment: OPEC Strategy Memo (due before class 14)

Take aways: Leadership, strategy, and planning in dynamic environments

11. Tacit Coordination (2/27/12)

Reading: DN Ch. 3, pp. 72-101, Dynamic Games (slides)

Take aways: Using threats and promises to create cooperation, limits to cooperation

13. Coordination in Practice: GE v Westinghouse (3/5/12)

Reading: C GE v Westinghouse

Take aways: Practical implementation of cooperation strategies

In preparing the case, please answer the following questions:

1. Is the turbine business a good one to be in?

2. What are the sources of competitive advantage for GE?

14. Commitment in Practice: Browser Wars (3/7/12)

Reading: C A Brief History of the Browser Wars, DN Ch. 7

Take aways: Practical implementation of commitment strategies

In preparing the case, please answer the following questions:

1. Why did IE overtake Netscape in market share?

2. Did bundling play a role? If so, how?

3. Was this an effective strategy for Microsoft?

15. Mid-semester presentations (3/12/12)

16. Mid-semester presentations (3/14/12)

17. Commitment and Coordination in Practice: OPEC Debrief (3/19/12)

Reading: DN Ch. 13

Take aways: Practical leadership, strategy, and planning in dynamic environments

18. Judo Strategies (3/21/12)

Reading: Judo Economics (experiment), C Judo in Action, Judo Results

Take aways: Limited commitment as competitive advantage

Mid-Semester Writeups Due Today

Assignment: Problem Set 4 (due before class 22)

DELETED 18. Principles of Bargaining (3/21/12)

Reading: DN Ch. 11, Bargaining (slides)

Take aways: key aspects of bargaining strategy, agreeing to principles, Nash bargaining solution

19. Venture Capital Financing (4/2/12)

Reading: DN Ch. 10, Venture Capital Financing (experiment), Results

Take aways: Structuring auctions to create/capture value, optimal bidding in auctions

20. Auction Design (4/4/12)

Reading: Auctions (slides), Kinked Bidding in First-Price Auctions

Take aways: Strategic equivalence, the revenue equivalence theorem

21. Strategy in Online Markets (4/9/12)

Reading: DN Ch. 9, Slides

Guest Speaker: Elizabeth Churchill, Yahoo

22. Wars of Attrition (4/11/12)

Reading: C Hold or Fold? The War of Attrition, C End-Game Strategies for Declining Industries, Wars of Attrition (slides), Wars of Attrition (notes)

Assignment: Problem Set 5 (due before class 26)

Take aways: Using the RET, game theory and exit strategies, recognizing wars of attrition

23. Pricing for Profitability in Online Markets (4/16/12)

Reading: Pricing on the Internet (experiment), A Dashboard for Online Pricing (CMR Article), E-retail results

Take aways: Hit and run pricing, optimal pricing

24. The Strategy of Uncertainty (4/18/12)

Reading: DN Ch. 5, Mixed Strategies (slides)

Take aways: mixed strategy equilibrium, strategic uncertainty, exploiting tendencies, volunteer’s dilemma

25. Signaling in Action (4/23/12)

Reading: DN Ch. 8, The Value of Education (experiment), Value of Education Results

Take aways: Credible signals, what makes a good signal, beliefs

26. Signaling in Theory (4/25/13)

Reading: Signaling (slides)

Take aways: Determining credible signals, assessing signals

27. What Makes Markets Tip (4/30/12)

Reading: Social Learning (slides), Reputation in Online Markets (CMR Article)

Take aways: Information cascades, reputational lock-in

28. Final project presentations (5/2/12)

29. Final project presentations (5/7/12)

Final Projects due on 5/14/12.

Course Objectives

This course is a survey of the main ideas and techniques of game-theoretic analysis related to bargaining, conflict, and negotiation. As such, the course emphasizes the identification and analysis of archetypal strategic situations frequently occurring in bargaining situations. The goals of the course to provide students with a foundation to:

(i) Apply game-theoretic analysis, both formally and intuitively, to negotiation and bargaining situations.

(ii) Recognize and assess archetypal strategic situations in complicated negotiation settings.

(iii) Feel comfortable in the process of negotiation.

The course has a strong experiential component. Students will repeatedly participate in a variety of strategic situations thereby developing the ability to translate their analyses into practice.

A working knowledge of basic calculus and ease with algebraic manipulation are prerequisites of the course. Prior exposure to microeconomics is very helpful.

Course Requirements

Regular attendance in class
- If you cannot attend for any reason, I ask that you contact me to let me know.
Participation
- Much of the learning in the class comes from your active contribution, so reading and thinking before class and actively conversing during class are key ingredients to a successful learning experience. In order to be prepared to participate effectively, you should read carefully the in-class exercises prior to coming to class. Reading should be active: as you read, think about your strategy, what assumptions you are making in deciding on this strategy. Also try to think about how others in the class might develop their strategies. You should be prepared to defend your actions in the class using logic, evidence, and calculation.
Problem sets
- To help you to gain ease in applying the tools of game theoretic analysis to the situations you will participate in during the class, there will be almost weekly problem sets and reflection essays.

The combination of attendance, participation, and problem sets count for 25% of the course grade.

Mid-semester Project (25%)
- To help to bridge the gap between the analytic tools and their use in the real-world business situations, you will be asked to prepare an “issue-spotting analysis” due on the 7^th week of class. This analysis, which should be 5-10 pages long, asks you to analyze a real-world issue “ripped from the headlines” where the techniques of game theoretic analysis might be fruitfully applied to aid in developing strategy. These analyses, which may be done in groups, are due prior to the start of the 7^th week of class. You will be asked to make a short presentation of the issue you chose and your analysis during class.
Final Project (50%)
- The final project, which is the “capstone” component to the class, asks you to find an issue or situation of strategic relevance where you can bring to bear a variety of ideas and techniques developed during the course. The final project can be a broadening and deepening of the issue-spotting analysis you did earlier or can be on a completely separate issue. Again, you are free to work in groups.
  - One-third of your grade for this project is determined by a 10-15 minute oral presentation during the 16^th week of class.
  - The remaining two-thirds of your grade for the project is determined by a 10-20 page write-up of your analysis. The page limit is based on a double-spaced paper exclusive of any tables or exhibits you wish to include.