Course Outline -- AGSM 306 Strategic Game Theory for Managers

Course Outline -- AGSM 306 Strategic Game Theory for Managers

AGSM 306 || Winter Term, 1998 || R. E. Marks
Lectures: Tues/Fri 10 || Ext. 271
Hugh Dixson Room || bobm@agsm

Reading/Reference List & Course Outline
Game theory provides a simple, but rich framework for analysing once-off and repeated interplay between people or firms, where the manner in which each reacts depends upon the other's reaction: strategic interaction. These interactions occur in markets, in organisations, and in the household. This subject--through lectures, experiential learning, and computer simulations--will attempt to provide students with understanding of many interactions they may encounter as managers, including price wars, wars of attrition, the value of cooperation interactions, and the value of information.
Outline of subject:

Lecture Topic
1. 1. Strategic Decision Making
2. Strategic Interactions.
3. More Strategic Interactions.
4. Yet More Strategic Interactions.
5. Game Trees. Oligopolies.
6. 2. Decision Analysis: Games Against Nature
7. Sensitivity Analysis.
8. Utility
9. 3. Strategic Moves
10. 4. Credible Commitments
11. 5. Repetition and Reputation
12. Information and credible commitments
12. 6. Unpredictability
13. 7. Bargaining
14. 8. Using Information Strategically
15. Signalling.
16. 9. Bidding in Competition
17. 10. Contracting, or the Rules of the Game
18. Employing, Financing, Franchising.
19. 11. Choosing the Right Game: Co-opetition
20.

Recommended texts:

Bierman H.S. & Fernandez L., Game Theory with Economic Applications, Addison-Wesley, 1993. This is highly recommended, if not required. It has good sections on games against nature (decision analysis), Nash equilibrium, subgame perfection, and mixed strategies.
Dixit A., & Nalebuff B., Thinking Strategically: the Competitive Edge in Business, Politics, and Everyday Life, New York: Norton, 1991. I have no hestitation in saying that all MBAs should have become familiar with this book.
McMillan J., Games, Strategies, and Managers, Oxford: OUP, 1992. A really good verbal discussion of the uses of game theory, but no game trees! I provide these in the Package lecture notes.

As well, the following books will be found useful:

Baird D.G., Gertner R.H., and Picker R.C., Game Theory and the Law, Harvard U.P., 1994.
Rasmusen E., Games and Information: An Introduction to Game Theory, Oxford: B. Blackwell, 2nd edition, 1994.
Ghemawat P., Games Businesses Play: Cases and Models, New York: Wiley, 1995.
Gardner R., Games for Business and Economics, New York: Wiley, 1995.

Additional readings will be found below. Recommended readings are marked with an asterisk (#). A Package of course notes is available. Readings in the Package are marked with a P

1. Strategic Decision Making

# Dixit & Nalebuff, Intro; Ch2 Anticipating your rival's response;
Ch3 Seeing through your rival's response.
# Barnett, F.W. Making game theory work in practice, Wall Street Journal, 1995. P
# Bierman & Fernandez, Ch5 Nash equilibrium I, Ch11 Nash equilibrium II
# O'Neill B., International escalation and the dollar auction, Journal of Conflict Resolution, 1986. P
# Schelling T.C., Ch7 Hockey helmets, daylight saving, and other binary choices, in his Micromotives and Macrobehavior, NY: Norton, 1978. P
# Marks R.E., Competition and common property, 1998. P
# McMillan J., Ch3 Understanding cooperation and conflict.
# McAfee R.P. & J. McMillan, Competition and game theory, Journal of Marketing Research, 1996. P
Baird, Gertner, & Picker, Ch1 Simultaneous decision-making and the normal form game.
Gardner, Ch1 Introduction, Ch2 Two-person games, Ch16 Voting games.
Rasmusen, Ch1 The rules of the game.
Schelling T.C., What is game theory? in his Choice and Consequence: Perspectives of an Errant Economist, Camb.: Harvard UP, 1980.

2. Decision Analysis -- Games Against Nature

# Apocalpse maybe, and An insurer's worst nightmare, The Economist, 1995/96 P
# Bierman & Fernandez, Chs 1-3.
# Ulvila J.W. & R. Brown, Decision analysis comes of age, Harvard Buisness Review 1982. P
# Howard R.A., Decision analysis: practice and promise, Management Science, 1988. P
Clemen R.T., Making Hard Decisions: An Introduction to Decision Analysis, Belmont, CA: Duxbury, 1996.
Samson D., Chs 2-6, 11, Managerial Decision Analysis, Chicago: R.D.Irwin, 1988.

3. Strategic Moves

# Dixit & Nalebuff, Ch5 Strategic moves.
Brams S.J. & J.M. Togman, Cooperation through threats: the Northern Ireland case, PS: Political Science & Politics, March 1998. P
Gardner, Ch4 n-person games, Ch5 Non-cooperative games.
Colman A.M., Ch8 Multi-person games: social dilemmas, in his Game Theory and Experimental Games, Oxford: Pergamon, 1982.
Kay J., Ch3 Co-operation and Co-ordination, in his Foundations of Corporate Success: How Business Strategies Add Value, Oxford: OUP, 1993.
Brams S.J., Ch1 International relations games, in Game Theory and Politics, NY: Macmillan, 1975.

4. Credible Commitment

# Dixit & Nalebuff, Ch6 Credible commitments.
# Bierman & Fernandez, Ch23 Subgame-perfect equilibrium
Rasmusen, Ch4.1 Subgame perfection.
Gardner, Ch6 Credibility and subgame perfection.
Ghemawat, Ch3 Preemptive capacity expansion in the titanium dioxide industry.

5. Repetition and Reputation

# Dixit & Nalebuff, Ch4 Resolving the Prisoner's Dilemma; Ch9 Cooperation and coordination.
Nowak, M., R. May, & K. Sigmund, The arithmetic of mutual help, Scientific American, 1995 P
# Hofstadter D., Ch29 The Prisoner's Dilemma computer tournaments and the evolution of cooperation, in his Metamagical Themas, Penguin, 1985. P
# Marks R.E., Midgley FD.F., & Cooper L.G., Adaptive behaviour in an oligopoly, in Evolutionary Algorithms in Management Applications, ed. by J. Biethahn & V. Nissen, (Berlin: Springer-Verlag), 1995. P
Baird Gertner & Picker, Ch2 Dynamic interaction and the extensive-form game, Ch5 Reputation and repeated games.
Gardner, Ch7 Repeated games, Ch8 Evolutionary stability and bounded rationality.
Rasmusen, Ch4 Dynamic games and symmetric information, Ch5 Reputation and repeated games with symmetric information.

6. Unpredictability

# Dixit & Nalebuff, Ch7 Unpredictability; Ch8 Brinkmanship.
# Bierman & Fernandez, Ch11.9
Gardner, Ch3 Mixed strategies.
Rasmusen, Ch3 Mixed and continuous strategies.

7. Bargaining

# Dixit & Nalebuff, Ch10 The voting strategy; Ch11 Bargaining.
# McMillan, Ch5 Gaining bargaining power; Ch6 Using information strategically.
# Elster J., Ch14 Bargaining, in Nuts and Bolts for the Social Sciences, Camb.: CUP, 1989 P
# Murnighan J.K., Game's End, Chapter 15 in his: Bargaining Games: A New Approach to Strategic Thinking in Negotiations, NY: William Morrow, 1992. P
# Bierman & Fernandez, Ch6 Bargaining.
Schelling T.C., Ch2 Essay on bargaining, in The Strategy of Conflict, Camb.: Harvard UP, 1980.
Baird Gertner & Picker, Ch7 Noncooperative bargaining
Gardner, Ch12 Two-person bargains. Ch14 n-person bargaining and the core.
Rasmusen, Ch11 Bargaining.
Brams S.J., Negotiation Games: Applying Game Theory to Bargaining and Arbitration, NY: Routledge, 1990.

8. Using Information Strategically

# McMillan, Ch6 Using information strategically
# Bierman & Fernandez, Ch17 Bayesian equilibrium, Ch19 Adverse selection and credit rationing
# Rasmusen, Ch2 Information P-13
Baird Gertner & Picker, Ch4 Signalling, screening, and nonverifiable information
Gardner, Ch9 Signaling games.

9. Bidding in Competition

# Revenge of the nerds, It's only a game, and Learning to play the game, The Economist, 1994 P
# Landsburg S.E., Cursed winners and glum losers, Ch18 of his The Armchair Economist: Economics and Everyday Life, New York: The Free Press, 1993.
# Norton, R., Winning the game of business, Fortune, 1995, P
# Koselka, R., Playing poker with Craig McCaw, Forbes, 1995, P
# Dixit & Nalebuff, Ch12 Incentives.
# McMillan, Ch11 Bidding in competition
# McAfee R.P. & J. McMillan, Analyzing the airwaves auction, Journal of Economic Perspectives, 1996 P
# R. Marks, Closed tender vs. open bidding auctions, 22 December, 1994. P
The Economist, Secrets and the prize, 12 October 1996, p.98. P
Scientific American, Making honesty pay, January 1997, p.13. P
Gardner, Ch11 Auctions.
Brams S.J. & A.D. Taylor, Fair division by auctions, Ch9 of their Fair Division: From Cake-Cutting to Dispute Resolution, Cambridge: CUP, 1996.
Rasmusen, Ch12 Auctions.

10. Contracting, or the Rules of the Game

# Kay, Ch4 Relationships and contracts.
# Dixit & Nalebuff, Ch12 Incentives.
# McMillan, Ch8 Creating incentives; Ch9 Designing contracts; Ch10 Setting executives' salaries.
# Williamson O.E., Strategizing, economizing, and economic organization, Strategic Management Journal, 1991. P
# Bierman & Fernandez, Ch7 Involuntary unemployment.
Gardner, Ch10 Games between a principal and an agent.
Milgrom P. & Roberts J., Ch5 Bounded rationality and private information; Ch6 Moral hazard and performance incentives. Economics, Organization and Management, Englewood Cliffs: Prentice-Hall, 1992.

11. Choosing the Right Game: Co-opetition

# Brandenburger A.M. & B.J. Nalebuff, The right game: using Game Theory to shape strategy, Harvard Business Review, 1995 P
Look at this Web page:
http://mayet.som.yale.edu/coopetition/index2.html
Koselka R., Businessman's dilemma, and Evolutionary economics: nice guys don't finish last, Forbes, October 11, 1993. P
Brandenburger A.M. & B.J. Nalebuff, Co-opetition: 1. A revolutionary mindset that combines competition and cooperation; 2. The Game Theory Strategy that's changing the game of business. New York: Currency Doubleday, 1996.
Brandenburger A.M. & Harborne W.S. Jr., Value-based business strategy, Journal of Economics and Management Strategy, 5(1), 1996.

And Beyond ...

Baird Gertner & Picker, Ch6 Collective action, embedded games, and the limits of simple models.
Morrow J.D., Game Theory for Political Scientists, Princeton: P.U.P., 1994.
Casson M., The Economics of Business Culture: Game Theory, Transaction Costs and Economic Performance, Oxford: OUP, 1991.
Schelling T.C., Altruism, meanness, and other potentially strategic behaviors, American Economic Review, 68(2): 229-231, May 1978.
Crawford V.P., Thomas Schelling and the analysis of strategic behavior, in Strategy and Choice, ed. by R.J. Zeckhauser, MIT Press, 1991.
For a history of game theory since Old Testament times, point your browser at the following URL: http://www.canterbury.ac.nz/econ/hist.htm
For further surfing on the 'Net about game theory, start at the following URLs:

http://www.pitt.edu/~alroth/alroth.html

Up
Last Updated 2 June 1998
Robert Marks, bobm@agsm.edu.au