Australian Graduate School of Management 306 S TRATEGIC G AME T HEORY FOR M ANAGERS

Outline of subject:

AGSM 306

Lectures: Mon/Thurs 10am
HDR

Winter Term, 2000

R.E. Marks Ext. 271, Room 251
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. It follows on from the Strategy section of Term 1 SET in MFP.

Outline of subject:


Recommended texts:
Bierman H.S. & Fernandez L., Game Theory with Economic Applications, Addison-Wesley, 2nd ed., 1998.
330.015193/4 D (On reserve) 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., &
Skeath S., Games of Strategy, New York: Norton: 1999. AGSM 519.3/2 (On reserve) A recent book, which
builds on Dixit & Nalebuff, used in SET last term. McMillan J., Games, Strategies, and Managers, Oxford:
OUP, 1992. AGSM 658.4035/8 (On reserve) 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: Rasmusen E., Games and Information: An Introduction to Game
Theory,
Oxford: B. Blackwell, 2nd edition, 1994. (On reserve) Ghemawat P., Games Businesses Play: Cases
and Models,
MIT Press, 1997. (On reserve) Gardner R., Games for Business and Economics, New York:
Wiley, 1995. (On reserve) Dutta P.K., Strategies and Games: Theory and Practice, Camb.: MIT Press, 1999.
AGSM 330.015193/6

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. I have also noted readings in the SET package as well.

* Dixit & Skeath, Ch3 Games with sequential moves, Ch4 Games with simultaneous moves * Schelling T.C., Ch7 Hockey helmets, daylight saving, and other binary choices, in his Micromotives and Macrobehavior, NY: Norton, 1978. P-3 * Marks R.E., Competition and common property, 1998, P-SET * McMillan J., Ch3 Understanding cooperation and conflict. * McAfee R.P. & J. McMillan, Competition and game theory, Journal of Marketing Research, 1996. P-SET Dutta, Ch2 A first look at the thory, Ch3 Strategic-form games and dominant strategies, Ch4 Dominant solvability, Ch5 Nash equilibria, Ch6 Extensive-form games and backwards induction. 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. AGSM 300/35 * Apocalpse maybe, and An insurer's worst nightmare, The Economist, 1995/96 P-5 * Hammond J.S., Keeney R.L., & Raiffa H., Hidden traps in decision making, Harvard Business Review, Sept.-Oct., 1998. P-6 * Matheson D. & J., The six dimensions of decision quality, The Smart Organization, Boston: Harvard Business School Press, 1998. P-7 * TreeAge Software, Decision analysis primer, DATA 3.5 User's Manual, Williamstown: Mass.: TreeAge Software, 1999. P-10http://www.treeage.com/demos/manual.html * McNamee P. & Celona J., Influence diagram theory P-8 Ch 3 Decisions under Uncertainty, Decision Analysis with Supertree, SF: Scientific Press, 1990. (On reserve) * Howard R.A., Decision analysis: practice and promise, Management Science, 1988. P-13 * Clemen R.T., Structuring decisions, and Sensitivity analysis, Making Hard Decisions: An Introduction to Decision Analysis, Belmont, CA: Duxbury, 1996 AGSM 658.403/242C P-9,12 * Samson D., Choosing between alternatives, Managerial Decision Analysis, Chicago: R.D.Irwin, 1988. P-11 * Skinner D.C., A thirty-minute guide to better decisions, Introduction to Decision Analysis, Gainesville: Probabilistic Press, 2nd ed., 1999. P-14 Dutta, Ch26 Probability and expectations, Ch27 Utility and expected utility. Bierman & Fernandez, Ch 10.5-10.7 * Bierman & Fernandez, Ch6 Subgame-perfect equilibrium * Dixit & Skeath, Ch9 Games with strategic moves. * Brams S.J. & J.M. Togman, Cooperation through threats: the Northern Ireland case, PS: Political Science & Politics, March 1998. P-4 Dutta, Ch13 Sub-game perfect equilibrium 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. (Short loan T2/98) 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. AGSM 320.0184/1 Rasmusen, Ch4.1 Subgame perfectness Gardner, Ch6 Credibility and subgame perfection. Ghemawat, Ch 3: Preemptive capacity expansion in the titanium dioxide industry * Dixit & Skeath, Ch8 The Prisoner's Dilemma game. * Nowak, M., R. May, & K. Sigmund, The arithmetic of mutual help, Scientific American, 1995 P-20 * Hofstadter D., Ch29 The Prisoner's Dilemma computer tournaments and the evolution of cooperation, in his Metamagical Themas, Penguin, 1985. P-19 * 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-21 Dutta, Ch14 Finitely repeated games, Ch15 Infinitely 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. * Bierman & Fernandez, Ch10.4 * Dixit & Skeath, Ch5 Simultaneous-move games with mixed strategies Dutta, Ch8 Mixed strategies Gardner, Ch3 Mixed strategies. Rasmusen, Ch3 Mixed and continuous strategies. * Bierman & Fernandez, Ch7 Bargaining. * Dixit & Skeath, Ch16 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-22 * 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-23 Schelling T.C., Ch2 Essay on bargaining, in The Strategy of Conflict, Camb.: Harvard UP, 1980. 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. AGSM 302.3/30 * McMillan, Ch6 Using information strategically * Dixit & Skeath, Ch12 Uncertainty and information * Rasmusen, Ch2 Information Bierman & Fernandez, Ch13 Bayesian Nash equilibrium, Ch15 Perfect Bayesian equilibrium, Ch18 Adverse selection and credit rationing Dutta, Ch24 Signaling games and the lemon problem Gardner, Ch9 Signaling games. * Bierman & Fernandez, Ch14 Auctions * Revenge of the nerds, It's only a game, and Learning to play the game, The Economist, 1994, 1996, 1997 P-SET * Sabbagh D., The numbers game, The Daily Telegraph, 1 April, 2000. P-27 * Landsburg S.E., Cursed winners and glum losers, Ch. 18 of his: The Armchair Economist: Economics and Everyday Life, N.Y.: The Free Press, 1993. P-SET * Norton, R., Winning the game of business, Fortune, 1995, P-SET * Koselka, R., Playing poker with Craig McCaw, Forbes, 1995, P-SET * Dixit & Skeath, Ch15 Bidding and auction design * McMillan, Ch11 Bidding in competition * McAfee R.P. & J. McMillan, Analyzing the airwaves auction, Journal of Economic Perspectives, 1996 P-25 * R. Marks, Closed tender vs. open bidding auctions, 22 December, 1994. P-26 * The Economist, Secrets and the prize, 12 October 1996, p.98. P-15 * Scientific American, Making honesty pay, January 1997, p.13. P-16 Dutta, Ch23 Auctions Gardner, Ch11 Auctions. Brams S.J. & A.D. Taylor, Fair division by auctions, Ch. 9 in their Fair Division: From Cake-Cutting to Dispute Resolution, Cambridge: CUP, 1996. AGSM 303.69/4 Rasmusen, Ch12 Auctions. * McMillan, Ch8 Creating incentives; Ch9 Designing contracts; Ch10 Setting executives' salaries. * Williamson O.E., Strategizing, economizing, and economic organization, Strategic Management Journal, 1991. P-26 * Kay, Ch4 Relationships and contracts. * Bierman & Fernandez, Ch12 Moral hazard and involuntary unemployment. Dutta, Ch19 Moral hazard and incentive theory 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. AGSM 338.502465/55 * Brandenburger A.M. & B.J. Nalebuff, The right game: using Game Theory to shape strategy, Harvard Business Review, 1995 P-29
Look at this Web page:
http://mayet.som.yale.edu/coopetition/index2.html * R. Koselka, Businessman's dilemma, and Evolutionary economics: nice guys don't finish last, Forbes, October 11, 1993. P-SET * 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. NY: Currency Doubleday, 1996. (On reserve) Brandenburger A.M. & Harborne W.S.Jr., Value-based business strategy, J of Econ & Management Strategy, 5(1), 1996. 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 URL: http://www.harvard.edu/~alroth/alroth.html

Assessment

There will be three assignments and a short term project. The first assignment will be handed out on Thursday, May 25, and is due two weeks later, on Thursday June 8, by 4 pm. This assignment is worth 15% of the final grade. The second assignment will be handed out on Monday, June 12, and is due on Thursday, June 22, by 4 pm. This assignment is worth 15% of the final grade. The third assignment will be handed out on Monday, June 26, and is due on Thursday, July 6, by 4 pm. This assignment is worth 15% of the final grade. Your project is due by 4 pm on Friday, August 14, and is worth 55% of the final grade. It may be done in groups of one, two, or three students. Please hand in a one- or two-page outline of the project topic by June 26. Groups will present brief outlines of their work on the last day of class. (See the excellent examples by Edwin Low and by Sue Strudwick in the Package (P-SET and P-2)). You should start thinking about a project as soon as possible. Please come and talk to me about (a) possible topics of application, and (b) if you want to form a team to do it. I shall hand out a list of possible (but not exclusive) topics in class, but you might like to look at some projects from previous years.

Previous projects available from Bob for perusal:
(M = movie, S = sport, W = war, B = business, N = novel, P = politics)



Lim ...........

incentives to reduce these. (5-week)

Ransom -- strategic interactions in kidnapping
M: Should extortionists be paid? Watch Mel Gibson turn the tables.
Analyses three interactions in the movie.

Loncar ......

Croatia's strategies in the fall of Yugoslavia
W: David v. Goliath: Croatia's political and military
strategies during the fall of Yugoslavia.

Low ..........

R.J.R. Nabisco: the world's richest auction P-5
B: Barbarians at the Gate helps answer two questions:
can game theory explain the protagonists' action in the L.B.O.?
would a game theorist have acted differently?

McKay .....

The Pacific War 1941-45: its beginning and end
W: Was the war inevitable? Why did the negotiations to end it fail?
Analysis of the Japanese and US diplomatic and military strategies.

Mutesigensi

The fate of student strikes
P: An analysis of a Ugandan student strike in which two students were
killed: a ``lose-lose'' outcome, which might have been avoided.

Pandey ......

Winning the Sydney 2000 Olympics
B: ``The Bid'' -- Australia's strategy in winning the Olympics.

Salvador ....

The Marco ouster ??
P: In 75 hours a small group of soldiers toppled the President.
Credible commitments and asymmetric information in the coup.

Sayers ......

The Bonfire of the Vanities
N: Master of the Universe or Master of the Game. McCoy falls.
Analysis of three interactions in the novel.

Shergold ....

Australian pay-TV
B: Game theory applied to three key interactions:
1. Optus and Telecom's cable rollouts
2. Murdoch v. Packer over Rugby League
3. Foxtel v. Optus Vision for the Seven Network.

Smith ........

Conrad's Nostromo, the novel
N: By modelling three games embedded in the novel's storyline,
shows how game theory can help in the analysis of the plot.

Strudwick ..

Celluloid games: Cannes Film Festival P-SET
B: Selling cinematic rights for independently produced motion
pictures on the Riviera analysed.

Thilges ......

China-Taiwan-USA international foreign policy ??
P: China v. Taiwan in 1995: or Shells over the straits.

Viney ........

Mahathir-Keating: recalcitrant duo?
P: Malaysia v. Australia: A three-week spat analysed.

Whitten .....

Entering the ERP software industry
B: Should Innovit enter the industry? Is it a zero-sum game?
An analysis suggests that Innovit's perspective was limited.

Yan ...........

Hong Kong Chinese newspaper price war
B: The entrance of the ``Apple Daily'' and the following price wars.