MT6: Alliances and Strategic Processes (Wk4 material)
*Recommended
~from Y1 notes
L7 Readings- Game Theory
*Hotelling, 1929- <principal of minimum differentiation>, rational for companies to make products as
similar as possible. Based on economic analysis of price and location setting game.
Bunching
* Brandenburger & Nalebuff, 1995- <PARTS, shaping the game> Rules based and freewheeling games.
Draw value net, coopetition (win-lose + win-win opportunities), change the game by modifying any of
the 5 elements of a game PARTS (players, added values, rules, tactics, scope). Action need not be
unique. GM-Household Bank card example (lose-lose price competition to win-win)
*Nagel, 1995- <behave with bounded rationality not game theoretic reasoning> experimental games
out-of-equilibrium behaviour explained by a finite depth of reasoning on players' beliefs of one another
(mode of degree 2), in repeated games, depth of reasoning does not increase but there is qualitative
learning direction theory, with adjustments based on previous results.
Camerer & Lovallo, 1999- <overconfidence, excess entry, reference group neglect>- experiments show
optimistic bias/ overconfidence of relative skill result in excessive business entry and high business
failure rates. Reference group neglect: subjects neglect that they are competing with a reference group
of subjects who all think they are skilled too.
From lecture:
Game theory more applicable in oligopolistic setting: each player is doing whatever it is best at
given what the other is doing
Regulation allowing escape from Prisoners' Dilemma in advertising
Strategic commitment to transform a simultaneous game into a sequential game
(overinvestment to deter entry)
o It is not always strategically optimal for an incumbent to overinvest in order to deter
entry
o Depends on whether investment makes incumbent more or less ‘tough’ in post-entry
game
o Depends on how entrant reacts to tougher play: Bertrand [price] reaction (competitors
also cut prices) and Cournot [quantity] reaction (competitors reduce production)
Not important
*Besanko, 2007- book. No chapter specified.
Crawford & Iriberri, 2007- <framed games and level-k thinking> past experiments show games that
frame decisions non-neutrally results in systematic deviation from equilibrium by subjects. Papers say
subjects do not think strategically or use explanations with unexplained changes in payoffs. The paper
proposes a 'level-k thinking' model that could explain empirical results. Players are rational, choosing
best responses to different levels (L2 is best response to L1...) based on simplified models of other's
decisions (L0 anchor may not be rational and affected by framing). Most people use L1/2/3 thinking.
Covered in Nagel, 1995
Goeree & Holt, 2001- <game theory vs empirical differences, intuitive explanations> inconsistency in
game theory predictions and experimental game results. These contradictions are generally consistent
, with intuition based on noisy introspection of others' decisions and interaction of payoff asymmetries
(eg. own payoff effect observed in mixed strategy when own payoff should have zero effect, seen only
when payoff is asymmetric)
Covered in Nagel, 1995
L8 Readings- Institutional Theory
Internal institutional differences (functional forms)
~*Chandler 1962- <Strategy & Structure> strategy leads to structure. U-form to M-form (DoS due to
coordination problems).
Own thoughts: in early stage, strategy leads to structure. In large companies, structure is sticky
and stakeholders' incentives, perspectives, and thus strategy is shaped by structure.
~*Armour & Teece, 1978- <M-form hypothesis> (induce goal pursuit by divisions, separation of
strategic/ operating decision-making, superior internal information and control techniques). It provided
superior performance until after diffusion. Study of petroleum industry as empirical evidence.
*Qian, Roland & Xu, 2006- <M-form vs U-form, 2 coordination types, experimentation scale> M-form
better at attribute matching (different specialized tasks complementary to each other match well), U-
form better at attribute compatibility (good coordination of similar/ substitutable tasks achieving scale
economies). M-form has flexibility of experimentation (small and full scale) unlike U-form (full-scale).
Small-scale is more beneficial for uncertain innovations but full-scale is good for innovations with high
success probability
External institutional differences
*Hall & Soskice, 2001- <comparative institutional advantage> Chapter 1. Institutional differences in
different varieties of capitalism (liberal vs coordinated market economies; with market vs strategic
coordination) could lead to different comparative institutional advantages of firms operating in them
(LME better for radical innovation, price competition, cheap labour vs CME for incremental innovation,
quality competition, skilled labour), which affects firm/ government response to globalisation (trade)
and policy.
From lecture
Functional forms often imply trade-offs: Organizing by geography may serve customers more
efficiently but organizing by task may lead to synergies in supply chain and manufacturing.
M-Form: Operational decisions are decentralized to those with necessary local knowledge but
duplication means less scale economies
M-form more useful after a certain size is reached. Otherwise, U-form may be better
Not important
*Besanko, 2007- Economics of strategy book. C16 on 'strategy and structure'. Sainsbury Library (Lower
Reading Room) HD30.28 BES 2007
*Hancké, 2010- NA
Examples
Bunching:
o McDonald's and Burger King, Target and Walmart, Whole Foods and Trader Joe's
