*Some examples are drawn from Dixit & Nalebuff,
Thinking Strategically
Strategic Decisions All Around
Strategic Situations
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Bidding-Negotiation;
Auctions; (homes, cars, yard
sales, …)
Employment: Job Market;
Board-Management;
Management-Labor;
Politics/Group Dynamics
Pricing, Ad, … Competition
Dating, Marriage
Families: Parent-Child,
Spouses, Siblings
Games: Poker, Chess, Risk,
…
Strategic Behavior
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Signaling & Filtering Info
Altering Perceptions-Beliefs
Promises/Threats
Changing “Rules”
Mixing Actions
Incentives for Cooperation
Cooperation-Compete Dilemmas
Free-Riding
• Situations with active responses by participants;
• Not merely playing against “the market” or “nature”
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Stuck In Jail
“Prisoner’s Dilemma”
 2 criminals arrested/Interrogated no contact
 Confess-Don’t Confess
○ 1 Confess: low/high sentences
○ 2 Confess: moderate sentences
○ No Confess: low/low sentences
Price Wars (ad, entry, … Competition)
 Confess = competitive outcome
 No Confess = “cooperative” outcome (positive
sum for participants)
“Hostage’s Dilemma”
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Political Chess:
Losing the Battle, Winning the War

Tom Hanks’ HBO series-- From the Earth to the Moon
– dramatizes the aftermath of the Apollo 1 deaths of 3 astronauts
during a routine launch pad test.
 A capsule fire broke out from a spark in wiring
 North American (the capsule contractor) had sent repeated warnings
to NASA about pressurized, oxygen-only tests
 NA “eats” their memos, accepts big part of blame. Why?
 Looking ahead and reasoning back:
○ Chance Congress will cancel program, especially of primary
blame on NASA
○ If program retained, NASA doesn’t have time to employ new
contractor
○ Accept/share blame, retain program, retain contract
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Beach Battles: “Location Games
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Where to setup shop if consumers positioned
uniformly along a beach that competitor is
trying to setup shop in best location also?
 Move to the middle (median), otherwise,
competitor can locate just to the “busier” side and
capture everyone on that side
Business Examples: McDonalds & Burger King; Many
retail stores; primary & general election races;
 Basic outcome holds with extensive information
and single choice dimension
 Harvard-Stanford MBA “Divide the Cities” and
focal points
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First Shall Be Last?
Sailboat Races/NCAA Football Overtime
 Second Mover Advantage: gain information …
 Business: innovation, e.g. MS Windows
Princess Bride “game of wits”
 First Mover Advantage: manipulate rival’s
information or choices
 Business: make rival’s entry/exit costly, build
up reputation
Hold’em Poker Tradeoff:
 Info manipulation v. info gathering … first or
last best seat
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Too Clever by One-Half?
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Jerusalem Taxi Ride
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Colts-Saints Super Bowl
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Game Changers: Strategic Moves
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Cortez Burning His Ships
 Threats/Promises/Commitments
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My Daughter’s “Salami Tactics”
Inflexible Personalities: DeGaulle
Retail Stores
 Changing set/range of choices
Office Politics
 Order of decisions
 Set of choices/proposals/matchups
 Voting rules
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Bargaining Basics
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“Ultimatum Game” Experiments
 Split of pot if 2 parties agree on split; 1 makes offer-1
accepts or declines offer;
 Variations: size of pot; depreciation of pot; anonymity;
repetition; wealth of participants; …
○ Money matters but not all that matters
○ Typical outcomes: bigger than 99:1, less than 50:50
○ Patience is a virtue; Patience is the best signal of
patience
Homebuilding Bargaining
 Tradeoff of Incentives:
○ Flex-price: sub info problem; easy changes
○ Fixed-price: no sub problem; changes hard
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Six Essentials Questions of Strategic Games
Who are Key Decision makers (units)?
What is the Timing of Decisions?
What Information is Available?
What Actions are Possible?
Payoffs to decisions?
Manipulation Possibilities?
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Insight on Solutions
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“Nash Equilibrium”
Choosing the best when opponent choosing best
 Sequential Games
○ “Rollback”: Look ahead to last period and work back
 Simultaneous Games
○ Iterative: step-by-step analysis of best choice given
a decision by other
 Repeated-Simultaneous Games
○ Rollback + Iterative
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“Nash”Iterative Solutions to Simultaneous
Game (PD Example)
• Payoffs = (Coke profits , Pepsi profits)
• Decisions: Price Low or Price High
Coke
Decision
Low
High
Pepsi Decision
Low
High
10,10
1,20
20,1
3,3
Example Solution to a
Simultaneous Game
•
First Iteration: Coke considers best choice if Pepsi sets low price
(column 1)
Best choice for Coke,
if Pepsi Sets Low Price
Pepsi
Coke
Low
High
Low
10,10
20,1
Solutions to Simultaneous
•
Second Iteration: Coke considers best choice if Pepsi sets high price;
•
Low is dominant strategy for Coke; Low better than high in both
iterations
Best outcome for Coke,
If Pepsi Sets High Price
Pepsi
Coke
Low
High
High
1,20
3,3
Solving Sequential Games
“Life must be understood backward, but … it must be
lived forward.” - Soren Kierkegaard
(Consider Chess as Example)
 Diagram a game tree – simplify if needed
 Start with the last move in the game
 Determine the best course(s) of action for
the player with the last move
 Trim the tree -- Eliminate the dominated
strategies
 Repeat the procedure at the prior decision
node(s) with the trimmed tree
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An Example: Market Entry
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Game Essentials:
 Players: Current firm (F) with large market
share faces a potential entrant (E)
 Timing: Potential entrant moves first
 Moves: Potential entrant (enter-stay out)
Current firm (accept passively-fight)
 Information: full information
 Payoffs: (see game tree)
 Rules: Fixed (to simplify game for now)
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Market Entry in Game Tree
Payoffs = (E, F) expressed as profits (mil $)
(0, 100)
E
(-10,-20)
F
(20,75)
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Looking Forward…
Entrant makes the first move:
○ Must consider how F will respond
 If enter:
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(-10,-20)
F
(20,75)
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Current Firm better off if accepts; so trim
“fight” branch from tree
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… And Reasoning Back
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Now consider entrant’s move with tree
trimmed
(0, 100)
E
F
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acc
(20,75)
Solution = (In, Accept Passively )
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