Game Theory Handout Using Strategic Commitment to Influence Competitor Response
Because the competitive environment is an endogenous outcome of the interaction between competitors, it follows that we must ask the question: "How can we influence the actions (or nonactions) of competitors to our benefit?" To answer this question, we must refer to the concept of strategic commitment and game theory. For example, consider the following hypothetical example from the commercial aircraft industry. Imagine that Airbus and Boeing are both considering launching a new aircraft to service regional air routes in the range of less than 2,000 miles. Currently, both companies have products to service this segment. However, these designs are more than 20 years old and customers are demanding dramatic improvements in efficiency and carrying capacity. The problem is that given the size of the market and the costs associated with developing the new aircraft, only one competitor can profitably design and launch a new product. Based on this information, industry financial analysts have forecasted differing payoffs under various scenarios (see Figure 1). For example, if both companies continue to sell their existing models (no launch), it is projected that Boeing will make an operating profit of $300 million over the next three years while Airbus will have an operating profit of $400 million. If Boeing launches the new aircraft and Airbus does not, Boeing will receive $400 million (after R&D expenditures) and Airbus will receive $200 million (assuming that Airbus would be able to keep part of the market by slashing prices to compensate for the technological advantages the new aircraft would have.) Assuming that Airbus is not as efficient as Boeing in the design of new aircraft, it is projected that if they launch the new aircraft and Boeing does not, Airbus will make profit of $300 million and Boeing will make $200 million. If both companies launch the new aircraft, Boeing will lose...
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