Class #12 Highlights

In this class, we learned about the theory of achieving coordination in repeated games. The idea is to combine carrots (promises of rewards for good behavior) with sticks (threats of punishment for bad behavior) to obtain cooperation.

This required: 

1. A payoff difference from the future consequences of bad versus good behavior. 

We saw that, when the game is only repeated twice or a small number of times, it was not possible to make credible promises to reward niceness in the last round of the game. As a consequence, good behavior breaks down. The lesson is that, as the endgame draws near, cooperation fails. 

2. Timely detection of bad behavior

We saw that, when an individual could get away with bad behavior for a couple of periods, sustaining cooperation became much more difficult. Likewise, delaying punishment also makes cooperation more difficult.

3. Proportional/Credible Punishments

If a punishment is so outrageous that the individual won't follow through, then it serves no role in getting good behavior. It must be credible that the punishment will be meted out. 

4. Forgiveness

Mistakes happen. An unforgiving punishment scheme suffers from two problems. It is disproportionate, so has credibility problems. It is also problematic since it cannot recover from errors. 

Together, these four keys allow for leveraging the future to achieve cooperation.

Revised Schedule

We are now officially one full class behind schedule. Accordingly, I have updated the syllabus to reflect the amended schedule. One topic, Principles of Bargaining, has been deleted and Judo has been moved into its slot. Please check the course website for the amended schedule. In terms of the near term roadmap:

Monday: GE v Westinghouse + OPEC Summit
Wednesday: Browser Wars

Following week: Mid Semester projects

OPEC Round 2 - Do Over

Dear Gamers,

Here are the results for round 2 (the do-over):

Market A: Price = 98.47, Quantity = 74,255
Market B: Price = 99.62, Quantity = 75,272

Round 3 due by Friday Wednesday at 1159pm. (Thanks for Billy Hwan for the alert correction.)

Class #11 Highlights

In class #11, we talked about building mental models. The case offers several frameworks that build up to form the "right" game to analyze. The first step, of course, is to gather relevant data. This is data not just about the financial aspects of a decision, but about the behavior of rivals as well. Competitor Analysis takes this data and uses it to paint a "portrait" of the rival. Sketching out assumptions and goals helps to determine which aspects of the payoff matrix on which to place weight. For example, Jerry Yang's founder status indicated that he highly valued control of Yahoo over other financial considerations. By studying current strategy and capabilities, one obtains a list of possible responses to your actions. For instance, if you are a startup contemplating a business model is some aspect of the social/mobile space, understanding the capabilities of Facebook is obviously essential in developing a non-threatening business strategy where their large user base will not be deployed against you. 

After completing a competitor analysis, it is useful to undertake a behavioral analysis. Are there ways that you can change the frame of a negotiation to get what you want? How does the positioning of the status quo affect the reaction to various negotiated outcomes. It is also useful to apply this same analysis to yourself. Is your data gathering subject to confirmatory bias? Are you overconfident in determining the appropriate scenario analysis to perform?

These behavioral factors can influence the perception of payoffs as well as the types of strategies your rival is likely to pursue. This is critical to building a mental model. Finally, game theory puts all of these analyses together to formulate what game is being played, what strategies are available and how payoffs are evaluated. As we saw in the Coors case, sometimes it is enough to know the relative payoff rankings, and these analyses can be especially useful in informing this aspect of payoffs. 

Together, these steps constitute the basic framework for assessing a rival's response to a new product introduction, a change in positioning, a new pricing strategy, and so on.

OPEC Do-Over

Dear Gamers,

I found the error in the simulator. Basically, the sum of all the OPEC quantities was coded as fixed rather than as reflecting the actual sum.

Here is the proposed fix. Since round 1 numbers were submitted legitimately, I reran the simulator with those quantities. The revised price results are

Market A: Price = $92.31, Quantity = 71,525
Market B: Price = $95.66, Quantity = 70,393

We will redo round 2 tonight at midnight. All subsequent rounds are the usual Mon, Wed, Fri at midnight schedule.

Sorry for the confusion.

OPEC Round 2

Round 2 results:

Market A: Price = 160.68, Quantity = 61, 576
Market B: Price = 165.80, Quantity = 62, 712

Market B enjoys a boom in demand while amenic demand plagues market A. Round 3 due by Monday at 1159PM.

OPEC Round One

The round one results are now available.