Monday, February 28, 2011


Free Samples

Many of you have asked about ideas for the mid semester project. There are many samples on the course website under the handouts tab of the course website. There you will find about 12 mid semester projects and 14 final projects from last year's class. This should give you some ideas about the scope, depth, and breadth of these projects.

Class 11 Take Aways

Thinking of Tomorrow

In this class, we learned about how to leverage the future to overcome social dilemmas. To be successful, a strategy must have: (1) rewards for good behavior, (2) punishment for bad behavior, and (3) forgiveness or proportionality of punishment in case of mistakes. The strength of the punishment needed depends on the size of the temptation in the present as well as the value of future rewards. Greater temptation or less future reward require greater punishment.

There are limits to sustaining cooperation and trust. When discounting of future cash flows is great or the chance that the game will continue is small then it may not be possible. The limit of when cooperation is sustainable is made by comparing rewards and punishments under a grim trigger strategy--the threat to be mean forever following any transgression.

Sunday, February 27, 2011

Final Farmville Update

Horse Barn, Borges Ranch
The Sun Sets on Farmville

Here's the final update: For both markets, verdant sold for 3, meadow for 2, and rocky for 1 in round 9. The market collapsed in round 10 with verdant selling for 1 and the others for zero. Hyperfarming was invented in period 11, so 10 was the last period. I've filled in the P&L for each team on the P&L spreadsheet at the site. In doing so, I noticed only a few teams put up P&L numbers for spectrum. Please put these up on the site.

Happy Farming.

Wednesday, February 23, 2011

Apple and Farmville

We typically think of Apple as using a classic differentiation strategy. They make elegant products that appeal to customers with a taste for high quality user experiences and charge a premium price for this. While that strategy has been very effective for Apple, it suffers from the imitability problem. As rivals produce products that are cheaper than Apple and reasonable substitutes in quality, Apple tends to lose share. The classic example of this was the development of the Window OS, which massively undercut Apple's advantage in UI quality.

Class #10 Take Aways

Toys and kisses
A Pyramid Framework

In Class #10, we worked out a framework for analyzing games. At the bottom of this framework is data, the building blocks for doing interactive strategy. The level above this is competitor analysis. Here we take our first cut at working out the details of payoffs and strategies available in the game as well as starting to make a mental model of our rival.

Class # 9 Take Aways

In the huddle
A Teams Problem

In class #9, we talked about the teams or partners problem. The problem goes like this: two partners work on a project. Each unit of effort returns 1+x dollars and imposes a personal cost of $1. Assume x < 1.

The problem is that individual effort cannot be directly observed.

Class #8 Take Aways

An Allocation Problem

In class #8, we discussed market design--what is the right way to allocate spectrum licenses? One way of allocating the licenses is to use a Vickrey auction.. This auction has the "pay your harm" property. You pay an amount equal to the harm you cause to the surplus of other bidders. With one unit for sale, harm is done to the second highest bidder in the amount of her bid, so the high bidder pays second highest bid.

Tuesday, February 22, 2011

Farmville Round 8

No property transactions or upgrade. Prices hold steady at 3, 2, 1 in both markets.

Saturday, February 19, 2011

Thursday, February 17, 2011

Farmville Period 6

Things were the same in both markets, so only one Farmville report.
Upgrades: Don't H8 the Playa upgrades 3 meadow to verdant. Class Reps upgrades 3 meadows to verdant, Playadize upgrades 1 meadow to verdant.

Tuesday, February 15, 2011

FarmVille Period 5

Market A

Market B

Upgrade Decisions:
Key: Team, Meadow to Verdant, Rocky to Meadow
F is a Big Deal, 3, 3
Mrs. Bento 15, 1
Free Riders 9, 0
Money on the Nightstand 3, 0
Gettin' Nashty 3, 0
Free Agents 3, 1
MOAB 3, 1
Class Reps 3, 3
Dont H8 the Playa 0, 3
Playadize 3, 1

Class # 7: Key Take Aways

In this class, we studied the game theoretic valuation of an asset. While the usual role for holding an asset in a company is for the cash flows it throws off, there can also be strategic reasons. The presence (or absence) of an asset can provoke certain types of strategic responses from rivals. In the case we studied, the presence of excess capacity created incentives for the rival to respond forcefully to a price cut.

Spectrum Auctions: Key Takeaways

Link: Results of Spectrum Experiment

Our first variant in the spectrum auctions experiment was the Vickrey auction. William Vickrey first designed this auction in a single unit context in order to obtain truthful revelation of values as a dominant strategy. The key point of the auction is that your bid only determines the threshold price for winning and losing. It does not determine the price you pay. When there's only a single object, it is easy to see how this works. Since I pay the amount of the second highest bid, my bid merely determines the maximum price I could possibly pay. As such, I can do no better than to set this threshold equal to my value.

Thursday, February 10, 2011

FarmVille Period 3

Class #6: Take Aways

Turkey VultureA Hawk-Dove Game in Action

In class #6, we formally introduced the notion of Nash Equilibrium. A Nash equilibrium is a set of strategies that are mutual best responses. We also talked about archetypal games, games representing a wide array of real world business situations. These included: pure coordination games, battles of the sexes (coordination with a distributive element), hawk-dove (coordination with distributive and risky elements), stag hunt (simple model of trust), and prisoners dilemma. A key observation is that rationality is not sufficient to avoid bad outcomes. While individuals might be perfectly rational, strategic interaction can produce collective irrationality.

Saturday, February 5, 2011

FarmVille Period 1 Results

Market B Results
Market A Results

Please note, the video reverses markets A and B owing to a transcription error on my part. All references to market B are for market A and vice-versa. Apologies for the glitch.
FarmVille FAQ

Thursday, February 3, 2011

Contact Information

Apparently some of you are very shy since there are only 3 teams with contact info on the board at present. Team Don't H8 the Playa kindly asked me to prod all of you to provide contact information. Apparently, they're ready to wheel and deal and looking for folks to trade with. To provide your info, go to the game theory P&L and add it to the "contact info" column on the spreadsheet. The direct link is:


Wednesday, February 2, 2011

McCain-Schumer Debrief


The key variation in the experiment turned on the timing of the game or, equivalently, the disclosure policy of Pharma. When a game is sequential, there is a chance to influence the rival's move with your move. In a simultaneous game, this is not possible. While it is normally to your disadvantage to reveal private information, when that information is your action choice, disclosure can be advantageous owing to this strategic influence.

Class #4: Key Takeways

Autumn Trail

Class #4 ended the unit on Look Forward, Reason Back. Here, we saw how the tools of game theory could be used to determine the appropriate course of action in the face of the threat of entry. In the case, Coors could opt for a proactive strategy, advertising in advance of the entrant, or a reactive strategy, advertising only if the entrant came into the market. Instinct would suggest that the proactive strategy is better, but game theory illustrates the possibility that the reactive strategy is the right one. The key condition is whether Coors will carry through with its threat to advertise if AB enters. If this is not credible, then Coors needs to take steps to make it credible.

The broader point is that simple tools of game theory can be extremely helpful in systematically analyzing strategic situations and determining the right course of action rather than relying purely on instinct. 


For the next couple of weeks, we will be running the game Farmville outside of class. This game illustrates the connection between game theory and competitive advantage in strategy. There will be two markets, one consisting of 8 teams and the other of seven teams. Please read the instructions in advance of class and I'll explain in class.

Road Map: Classes 6 and 7

Sugarloaf Trail
In class #6, we will discuss how to analyze games with simultaneous moves and highlight a number of "building blocks" for studying strategic situation. Please read the class notes in advance. Class #7  introduces the idea of dominant strategies. Here, we will be doing an experiment simulating the radio spectrum auctions.