Quiz 13: Best-Practice Tactics: Game Theory
A dominant strategy is defined as the action plan that maximizes the welfare of the decision maker whose decision is independent from the other player actions. AB applied a dominant strategy to go ahead with the A380 super jumbo which carries 550 passengers. The possible reason for AB to take this decision is to enter into the new segment as AB does not have any product launch in this segment. Although it requires 300 orders, AB might be confident to lead this segment.
There are two firms in the market - T and H. Each firm has to choose either for an extensive promotion or a low promotion. The payoff matrix for the given decision-making problem is as shown in Table 1. b. Extensive promotion is Firm H's dominant strategy because Firm's payoff is higher under extensive promotion as compared to low promotion, given any strategy of Firm T. When firm H's strategy is extensive promotion, then its payoff is $5 million when firm T's strategy is extensive promotion and $9 million when firm T's strategy is low promotion. Therefore, Firm H's minimum payoff is $5 million. c. The game is symmetric for both the players. Therefore, firm T's dominant strategy and minimum payoff amount are also extensive promotion and $5 million respectively. d. When the game is repeated over multiple decision-making periods, then each firm may want to signal to the other firm that is ready to cooperate so as to increase future stream of profits. Therefore, the firms may not to choose to play their dominant strategies whenever this game is repeated over multiple decision-making periods.
It is important to analyze the sequential order of play between A and B tactical competition. Suppose B identifies profit at 45 percent market share rather than at 65 percent share in competition with A. Then B can withdraw from the competition of 65 percent market share analyzing the benefits in 45 percent market share. It would be advantageous for B if it makes early move instead to worsen in future. Implementing the dominant strategy, B has to take the action plan that maximizes its welfare independent of its competition with A. By implementing necessary strategies, B can increase their margins in less production at 45 percent market share.