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Flashcards in Lecture 1/Module 1 Deck (42)
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1
Q

Strategy

A

A complete plan for every contingency.
Takes into account what others can be reasonably expected to do.
Interested in what other people have done/may do.

2
Q

Players

A

Consumers (are strategic–net consumers in price shopping/comparing prices–$10 @ WalMart vs $20 @ Target), Suppliers (upstream), Complementors (downstream), Rivals

3
Q

Complementor

A

Hardware/Software

ex: Supermarket is complementor for laundry detergent to help get them to customers.

4
Q

Optimum and Equilibrium

A
Optimum: That which is best.
Equilibrium: When everyone is at their best response (not best decision).
1) Single person decision
2) Multi-person decision
    a) Best response
    b) Equilibrium
5
Q

Value Net

A

In order to produce the value, consumer must make a purchase and use the item. The frozen dinner depends on the consumer having a freezer and microwave (complementors). Also depends on suppliers to make sure frozen dinner is preserved in packaging. Competitors hike/rise price.

A conceptual way of thinking about the fact that what gthe consumer gets out fo our offer really deoends on a whole host of people that can act individually. However, we can study the interactions systematically.

6
Q

Nash Equilibrium

A

Content Needed

7
Q

Principle of Optimality: at the optimum we set

A

MC (marginal cost) = MR (marginal revenue)

If MC is LESS than MR, put in more effort.
If MC is HIGHER than MR, put in less effort.
Equal is good.

8
Q

Conundrum of Best Response

A

Things could be better, but they’re not when we give in to Best Response in context to our situation (involving other people we cannot control). Does not mean full effort is given.

9
Q

Co-opetition

A

Cooperation/Competition – Pie Graph

You’d like to cooperate, but you are competing.
Instead: FIRST, cooperate. NEXT, compete to make the pie bigger.

Communication in the beginning about what process will be going through to make sure time and money isn’t wasted.

The pie is smaller because they are all at their best response, so they have to get away from their best response.

10
Q

Demand Curve

A

Price goes up–Demand shrinks.

Price goes down–Demand rises.

11
Q

Demand Formula

A

𝑆=𝐴−𝐵𝑝 if price is p

12
Q

Profit Formula

A

𝜋=(𝑝−𝑐)(𝐴−𝐵𝑝) if variable (marginal) cost is c

13
Q

We know that to maximize 𝜋, the optimal choice of 𝑝 is

A

𝑝^∗=0.5(𝐴/𝐵+𝑐)

14
Q

A strategy is…

A

A complete action plan to accomplish a goal that could be a battlefield goal or more often a political goal.

15
Q

How do you develop a strategy?

A

By taking into account how the opponent would act and how the units that support the strategy would act in tandem.

16
Q

What makes a plan good?

A

When it’s in the context of others’ plans.

17
Q

What is the best outcome for a firm?

A

One that maximizes profits.

18
Q

Another aspect of the strategic interaction between consumers and firms has to do with…

A

the long-term relationship that involves repeated interactions.

19
Q

Firms place a premium on having “satisfied” customers because…

A

having the consumer’s confidence in the quality of a firm’s offering and the consumer’s trust in the firm’s communications is key to maximizing long-run profits. Keeping that in mind it could even make sense to sacrifice immediate profits on occasion.

20
Q

Rivals

A

Those that are competing for the same consumer-exchange outcome. In some cases it could be helpful to include among rivals other firms collaborating with the same partners.

21
Q

Value Net

A

Web of Interactions: Strategic interaction occurs between the firm on the one hand and consumers, suppliers, complementors and rivals on the other hand.

22
Q

What does the optimum depend on?

A

What others are doing. More generally, you want to know what others are thinking of doing.

23
Q

John Mayanrd Keynes is reported to have said

A

“Successful investing is anticipating the anticipations of others”. Indeed, an optimal decision depends on what others can be expected to do. A seller’s optimal decision must anticipate how consumers, partners and rivals behave.

24
Q

Rational Expectations

A

Anticipations are called expectations and expectations that are correct in the sense that they actually come to pass are called rational expectations.

25
Q

Best Response

A

If an action is optimal given what other agents do.

26
Q

Equilibrium

A

When all agents are at a best response, clearly none of the agents has an incentive to choose an action other than what they chose. And so, they stay put. When nobody wants to change their decision because all agents are at their best response, such an outcome is called an equilibrium.

27
Q

John Nash proved that…

A

…in almost all situations of strategic interaction we can indeed find an outcome in which each agent is at a best response. For this reason, an equilibrium is often also referred to as a Nash equilibrium.

28
Q

One of the interesting properties of a Nash equilibrium is…

A

…even though each agent is at a best response all the agents collectively may not be at an “optimum”.

29
Q

Co-opetition

A

Brandenburg and Nalebuff suggest that sophisticated managers are better off developing competitive strategies that recognize the benefits of co-operation in making the pie larger. They call this approach co-opetition.

30
Q

Tit for tat strategy

A

Each store wants to attract customers, and one way of doing this is to advertise lower prices. In particular, customers who find one store convenient may nevertheless shop at the other if the price at the latter were lower. Convenient location is trumped by lower prices. In this case what can the first store do? Suppose it follows a policy of matching prices, which says that a customer who finds lower prices at the second store can buy products at the first store at the lower price. So any customer exposed to the second store’s advertisement could obtain the lower prices without foregoing the convenience of the first store! This sort of price matching is more generally a tit for tat strategy that takes away the advantage of lower prices. When both stores follow a price matching strategy, the result is that each store obtains customers who find it convenient and neither store finds it worthwhile to advertise low prices.

31
Q

Can firms achieve higher levels of advertising to increase the size of the pie by adopting a tit for tat strategy?

A

No

32
Q

Cheap Talk

A

Suppose in the crowdfunding example, donor 1 decides to tell donor 2 what she intends to do. Of-course there is no rule that she must speak the truth. And, what she says will not affect the outcome, only what she does. So, we say this is cheap talk. Still, if what she says affects what donor 2 would do, even cheap talk could affect the outcome, indirectly.

33
Q

Even if you’re not bluffing, you’re still mesing with who’s heads?

A

Competitors and ESPECIALLY the consumers

34
Q

What is a meaningful contract?

A

The contract tells each party what they are responsible for.

Verifiable of action: Is it enforceable by law?

Individual Rationality: Are the contract terms acceptable to both (all) parties? (Is there a benefit over outside options? Can you buy cheaper with rebate?)

Incentive Compatibility: Make sure the contract does not contain incentives for agents to lie. Don’t expect them to be honest if you provide an incentive.

–Ex: provide standing desk for people wth pain? people may lie about having pain to get a standing desk.

35
Q

wholesale price

A

determines the retail price

36
Q

the size of the pie is…

A

…the retailer’s profit +the manufacturer’s profit

–smaller than if there is no retailer

37
Q

can we write a contract b/w r and w so that the pie does not get smaller?

A

when you have a contract that makes sure each party would make just as much/more without the contract

38
Q

Tit-for-tat

A

Tit-for-tat is a sort of punishment strategy. You simply follow or imitate what the other does

39
Q

Tit-for-tat

A

Tit-for-tat is a sort of punishment strategy. You simply follow or imitate what the other does.

Consider two supermarkets
WE WILL NOT BE UNDERSOLD!
YOU CUT PRICE I WILL CUT TOO!
So one raises price, then the other can also raise price

Price matching — tit-for-tat —leads to higher, co-operative pricing

“I take away the incentive for you to do something bad. If you mess with me, then I’m going to mess with you.”

40
Q

Does Tit-for-Tat always work?

A

Might actually lead to higher prices.

Depends on many things
For one, it must pay the other to follow suit
For example in the franchisee free riding problem
If one franchisee increases advertising, it pays the other to decrease its advertising, so go opposite
In this case tit-for-tat won’t work
WE MAY NEED PUNISHMENTS!
Follow suit is also called strategic complement and go opposite is called strategic substitute

41
Q

Repeated Encounters

A

Imagine two firms that want to charge prices higher than Nash equilibrium prices so that profits are higher at 𝜋.
Can they sustain that?

Let us they start off cooperating at higher price. One firm says let me cut price and make extra money!
Extra money of $K (incremental profit)

The other guy says I am going to teach you a lesson. I am cutting price to zero, so you will make zero profits instead of the agreed upon 𝜋.
So every period that the price is zero, there is a “loss” of 𝜋! Over many periods if this accumulated loss is more than the extra money $K, then the firm that “deviated” has a net loss. The threat of such punishment stops any deviation!

It is the threat, not the actual punishment. Since there is no deviation, there is no need for punishment to be meted out!

42
Q

When Does Cheap Talk Work?

A

For coordination
The two players’ interests must coincide or at least be positively correlated
Mistakes by one or the other should not be excessively costly to the other.