UNIVERSITY OF CALIFORNIA – BERKELEY Haas School of Business
Professor John Morgan
665 Faculty Building
510.642.2669
Spring 2010 morgan@haas.berkeley.edu
faculty.haas.berkeley.edu/rjmorgan
Office hours: By appointment
Tuesday and Thursday 9:30 -11:00 AM
C220
This course is a survey of the main ideas and techniques of game-theoretic analysis related to bargaining, conflict, and negotiation. As such, the course emphasizes the identification and analysis of archetypal strategic situations frequently occurring in bargaining situations. The goals of the course to provide students with a foundation to:
(i) Apply game-theoretic analysis, both formally and intuitively, to negotiation and bargaining situations.
(ii) Recognize and assess archetypal strategic situations in complicated negotiation settings.
(iii) Feel comfortable in the process of negotiation.
The course has a strong experiential component. Students will repeatedly participate in a variety of strategic situations thereby developing the ability to translate their analyses into practice.
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Regular attendance in class o If you cannot attend for any reason, I ask that you contact me to let me know.
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Participation o Much of the learning in the class comes from your active contribution, so reading and thinking before class and actively conversing during class are key ingredients to a successful learning experience. In order to be prepared to participate effectively, you should read carefully the in-class exercises prior to coming to class. Reading should be active: as you read, think about your strategy, what assumptions you are making in deciding on this strategy. Also try to think about how others in the class might develop

MBA 211
Game Theory
J. Morgan
Spring 2009 their strategies. You should be prepared to defend your actions in the class using logic, evidence, and calculation.
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Problem sets o To help you to gain ease in applying the tools of game theoretic analysis to the situations you will participate in during the class, there will be almost weekly problem sets and reflection essays.
The combination of attendance, participation, and problem sets count for 25% of the course grade.
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Mid-semester Project (25%) o To help to bridge the gap between the analytic tools and their use in the real-world business situations, you will be asked to prepare an “issue-spotting analysis” due on the
7 th week of class. This analysis, which should be 5-10 pages long, asks you to analyze a real-world issue “ripped from the headlines” where the techniques of game theoretic analysis might be fruitfully applied to aid in developing strategy. You will be asked to make a 10 minute presentation of the issue you chose and your analysis during class.
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Final Project (50%) o The final project, which is the “capstone” component to the class, asks you to find an issue or situation of strategic relevance where you can bring to bear a variety of ideas and techniques developed during the course. The final project can be a broadening and deepening of the issue-spotting analysis you did earlier or can be on a completely separate issue. Again, you are free to work in groups.
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One-third of your grade for this project is determined by a 10 minute oral presentation during the 15 th week of class.
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The remaining two-thirds of your grade for the project is determined by a 10-20 page write-up of your analysis. The page limit is based on a double-spaced paper exclusive of any tables or exhibits you wish to include.
Required:
Gibbons, R., Game Theory for Applied Economists, Princeton University Press, 1992. (Hereafter G)
Gibbons’ book is a much more mathematically rigorous introduction to game-theoretic analysis.
While Gibbons’ emphasis is on teaching economists the basic tools of game theory, readers seeking more analytic structure will find the text invaluable.
Dixit, A. and B. Nalebuff, The Art of Strategy , WW Norton, 2008 (Hereafter DN)
A very readable introduction to the main ideas in game theory and their application to real-world situations.
Optional:
Dixit, A. and B. Nalebuff, Thinking Strategically, WW Norton, 1991.
Covers much the same material as The Art of Strategy . The examples are more dated, and the focus is more on competition.
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Coursepack available on Study.net.
Readings contained in the coursepack will be denoted by “C” in the assignments below.
Most class sessions will consist of both “hands-on” experiences in structured strategic situations as well as lectures about the theory underlying these situations. Discussion relating experiences in structured settings to both theory and practice are an essential aspect of the course.
Apart from the required text, I will provide all materials used in the course electronically through links at the course website. Some PowerPoint slides, which go into more depth about certain lecture topics are available in advance. Problem sets, experiments, and so on will also be distributed electronically. I will distribute virtually nothing on paper, so print as you see fit from the electronic materials.
I encourage electronic submission of all materials including completed problem sets, strategy memos, offline results, and so on. You are, of course, free to submit hard copy if you like.
You should feel free to contact me via e-mail at any time. I try to turn around messages fairly quickly.
I require attendance and participation in this class. You can expect to be cold-called throughout the course, so be prepared. In addition, part of your participation grade depends on your performance in the in-class experiments, so it pays to take these exercises very seriously.
Below is an outline of the course that roughly corresponds to a class session. It is important to emphasize that the outline is subject to change based on demand, timing differences, etc.
1.
Course Overview
Reading: Course overview (slides), DN Ch. 1
Take aways: Overview of game theory; goals of the course; lens through which to view strategy
2.
Rights of First Refusal
Reading: NBA Free Agency (experiment), C Games of Strategy: An Introduction, pp. 1-5
Assignment: Problem set 1 (due before class 3)
Take aways: Fundamental principle of game theory: look forward, reason back; game theoretic versus “normal” options
3.
Look Forward, Reason Back
Reading: DN Ch. 2, Coors in the 1970s (caselet), Look forward, reason back (slides)
Take aways: Recipe for analyzing strategic situations
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MBA 211
Game Theory
J. Morgan
Spring 2009
4.
Timing is Crucial
Reading: The Gaming of Pharmaceutical Patents (handout), McCain-Schumer (experiment)
Take aways: Timing in games; the strategy of (non)disclosure
5.
Timing in Games
Reading: DN Ch 4, G Ch. 1, C Games of Strategy: An Introduction, pp. 6-8, C Game Theory and
Business Strategy
Take aways: Nash equilibrium
6.
Archetypal Strategic Situations
Reading: Games with Simultaneous Moves (slides)
Assignment: Problem set 2 (due before class 5)
Take Aways: Archetypal strategic situations with simultaneous moves; links between competitive strategy and game theory
7.
Spectrum Auctions
Auctioning the Spectrum (experiment)
Take Aways: Dominant strategies, Vickrey auctions
8.
Prisoners Dilemmas and Free-Rider Problems
Reading: DN Ch. 3 pp. 64-71, Dominance (slides)
Take aways: Archetypal strategic situations with dominant strategies; “solving” social dilemmas
9.
Building Mental Models
Reading: C Competitor Analysis: Anticipating Competitive Actions
Take aways: Competition framework, behavioral analysis, competitor analysis
10.
OPEC
Reading: DN Ch 6, OPEC (experiment)
Assignment: OPEC Strategy Memo (due before class 7)
Take aways: Leadership, strategy, and planning in dynamic environments
11.
Tacit Coordination
Reading: DN Ch. 3 pp. 72-101, G Ch. 2, Dynamic Games (slides)
Take aways: Using threats and promises to create cooperation, limits to cooperation
12.
Coordination in Practice: GE v Westinghouse
Reading: C GE v Westinghouse
Take aways: Practical implementation of cooperation strategies
In preparing the case, please answer the following questions:
1.
Is the turbine business a good one to be in?
2.
What are the sources of competitive advantage for GE?
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MBA 211
Game Theory
J. Morgan
Spring 2009
13.
Commitment in Practice: Browser Wars
Reading: DN Ch. 7, C A Brief History of the Browser Wars
Take aways: Practical implementation of commitment strategies
In preparing the case, please answer the following questions:
1.
2.
3.
Why did IE overtake Netscape in market share?
Did bundling play a role? If so, how?
Was this an effective strategy for Microsoft?
14.
Commitment and Coordination in Practice: OPEC Debrief
Reading: DN Ch. 13
Take aways: Practical leadership, strategy, and planning in dynamic environments
15.
Mid-semester presentations
16.
Mid-semester presentations
17.
Principles of Bargaining
Reading: DN Ch. 11, Bargaining (slides), MLB (experiment)
Assignment: Problem set 4 (due before class 11)
Take aways: key aspects of bargaining strategy, agreeing to principles, Nash bargaining solution
18.
Game Theory in Platforms
Reading: DN Ch. 9,
Guest Speaker: TBD.
19.
Judo Strategies
Reading: Judo economics (experiment), C Judo in Action
Take aways: Limited commitment as competitive advantage
20.
Venture Capital Financing
Reading: DN Ch. 10, Venture Capital Financing (experiment)
Take aways: Structuring auctions to create/capture value, optimal bidding in auctions
21.
Auction Design
Reading: Auctions (slides)
Take aways: Strategic equivalence, the revenue equivalence theorem
22.
Wars of Attrition
Reading: C Hold or Fold? The War of Attrition, C End-Game Strategies for Declining Industries
Assignment: Problem Set 5 (due before class 13)
Take aways: Using the RET, game theory and exit strategies, recognizing wars of attrition
23.
Pricing for Profitability in Online Markets
Reading: E-retail pricing (experiment), A Dashboard for Online Pricing (CMR Article)
Take aways: Hit and run pricing, optimal pricing
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MBA 211
Game Theory
J. Morgan
Spring 2009
24.
The Strategy of Uncertainty
Reading: DN Ch. 5, Mixed strategy (slides)
Take aways: mixed strategy equilibrium, strategic uncertainty, exploiting tendencies, volunteer’s dilemma
25.
Signaling in Action
Reading: DN Ch 8, Value of education (experiment)
Take aways: Credible signals, what makes a good signal, beliefs
26.
Signaling in Theory
Reading: Signaling (slides)
Take aways: Determining credible signals, assessing signals
27.
What Makes Markets Tip
Reading: Social Learning (slides), Reputation in Online Markets (CMR Article)
Take aways: Information cascades, reputational lock-in
28.
Catch-up
29.
Final project presentations
30.
Final project presentations
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