Microeconomics · free preview
Thinking in Trees
A game is players, strategies and payoffs, sequential games are read backward from the end, and the entrant-versus-incumbent tree shows why the last mover's incentives decide the first.
1. The elements
The elements
2. Reading the tree backward
Reading the tree backward
3. The threat that isn't
The threat that isn't
4. Where trees grow
Where trees grow
5. Solving by backward induction
In the entry tree, if the entrant enters, the incumbent can fight for payoffs -20 to the entrant and 20 to itself, or accommodate for 30 each. Staying out yields 0 and 100. What does backward induction predict?
6. Non-credible threats
Why does the incumbent's threat to launch a price war fail to deter entry in the one-shot tree?
7. The value of sharing
In the entry game, fighting yields the incumbent 20 and accommodating yields 30. Compute the incumbent's payoff sacrifice from fighting rather than accommodating after entry has occurred, and write the number.
8. Reading the tree backward
What does backward induction require a player to do in a sequential game tree?
9. The threat that isn't
An incumbent threatens a price war if anyone enters, but accommodating an entrant would earn the incumbent more than fighting. What does game theory conclude?
10. The cost of fighting
In an entry game, fighting yields the incumbent 15 while accommodating yields 35. Compute the incumbent's loss from carrying out its price-war threat, and write the number.
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