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Feedback on assignment

I need you to analyze the game in the discussion.  Why with the entrant enter and why will the rational incumbent accommodate?

you made some progress, but there can be a little improvement. There are two thing that are key. First, the entrant will enter. I explain more below. Second, let's follow this through to see what the game teaches us. Please remember that the process here is one of continuous improvement.

If you look ahead to the final writing assignment you will see the first question is about identifying a company that has faced risk and uncertainty in the last six months. This week's problem, which is called the entry-deterrent game is actually a classical problem first articulated and analyzed in the 1830s by Antoine A Cournot! This problem is about taking a calculated risk. It is about a cost benefit assessment where one know the payoff. I hope you will take a few minutes to view the video place in the class shell on the Cournot Duopoly as a Nash Equilibrium.

let's turn to your excellent work on this problem. So, let's dispense with one question first. The entrant will enter. The opportunity cost of not entering is the sure 5 the entrant wins on entering. Another way of looking at this entry question is to see that while some entrants may decided to pass of the game, with a potential profit of 5, somebody will enter. This is a contestable market.

Now that we know someone will compete for this market so to solve this problem, one really needs to apply the first in Froeb's analytical tool kit, look ahead and reason back. If you have watched the Queen's Gambit they show the players think through all the moves an opponent can make, given any move the player may chose to make. If we do that in this game there is a clear conclusion that the entrant is better off if there is not an option to withdraw. If it is known that there is no option to withdraw, the incumbent is not going to fight, but accommodate. The entrant will gain one half of the market.

now we can use this first element of our understanding to analyze what will happen if there is an option to withdraw. It is clear that the option to withdraw adds to the risk, but what if the entrant ignores the option to withdraw and makes every indication that they are determined to stay, i.e. play the game as if there is no option to withdraw, the entrant will enter. THAT IS WHERE THE COURNOT VIDEO CAN HELP US OUT! A determined entrant, can prevail by merely refusing to give up and a determined entrant can gain half of the market. you really had this idea in your presentation.

The lesson in this game theory exercise is to help us look ahead and reason back so we can see and manage the risk of a decision or policy. The risk is a fight which carries a loss, but the role of an entrepreneur is to balance risk and reward. The potential reward here is a profit of 5, or half of the total market of 10. The firm will play the game and enter the market. What Cournot showed is that after multiple rounds of play, in a market in which there is no legally mandated monopoly, the single firm making a monopoly profit will be challenged by others for a share of that monopoly profit and the firm that persists even if fought by the incumbent, will ultimately gain 50% of the market. The division of the market into a 50/50 split is a Nash equilibrium.

So let me provide a real life example of the entry-deterrent game. Let's say we have an inter-state exit and there is only one gas station at the exit. It is 20 miles to town from the exit and the next exit is 50 miles either away. THIS GAS STATION WILL BEHAVE LIKE A MONOPOLIST! IT WILL CHARGE MORE PER GALLON THAN IT WOULD IF IT WERE LOCATED IN/OR MUCH NEARER TO TOWN, but it has no legally protected monopoly. Other potential operators will notice that there are greater than normal profits. There is a low barrier to entry, in fact there is no more cost than would be involved in opening a gas station any where in the area, but it is clear there is a profit at this exit. Another operator will enter the market. Eventually as the traffic volume grows, the exit will be filled by other operators. The rational incumbent will know that fighting an entry cost money and even if the incumbent beats one entrant it can't win in the long-run. Better to accommodate upfront. Of course, the ultimate outcome of the duopoly game at the exit is that the market equilibrium will settle at each corner occupied and we have an oligopoly. Gas station wars were the first industry to be modeled using the kinked-demand curve of an oligopoly market.

The contribution of game theory is that like other modeling techniques, is helps us see ahead and reason back. Game theory has help us with a cleaner more simple tool for analyzing strategic games, but the games themselves are old games. The entry deterrent game is what we call a zero sum game, what one person wins the other person loses. We have provided another game for you to examine, the bargaining game. A bargaining game is a win-win game where people seek to divide the net surplus of a joint venture between the parties, like partners in international trade or like management and labor. I hope you will try solving that game. The solution will be posted at the end of the week. I am looking forward to continuing this conversation! By the way, we will return to this as a real life game in week 10! Dr Phyllis Isley.

, exceptional job. This was a great opportunity to put together all the elements of a case study. First, case studies writing to explain or advocate for specific actions or policies. Role playing the advocate makes one the focus of the story and in this case the story was best started by advocating entry into the market. The next step is to explain why take the risk and how does one avoid the potential deterrence posed by the incumbent. The conclusion of course is that the entrant is better off with out the option to withdraw, but the lesson is that to succeed all one has to do is persist. We will have a chance to see the entry-deterrence game played out in week 10.