Game Theory & Business Strategy MGT 425

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1 Spring 2011, Mod III INSTRUCTOR INFORMATION Professor: Mike Shor Office: Management Hall 352 Phone: Game Theory & Business Strategy MGT 425 COURSE WEB SITE COURSE DESCRIPTION People rarely make decisions in a vacuum. The right choice for us may depend upon the choices made by others. In turn, the profits and happiness of these other individuals depends on the actions that we will take. Game theory offers a systematic way of analyzing strategic decision-making in interactive situations. This course develops a conceptual framework for understanding business strategy. As it is a course in theory, we take an analytical and often quantitative approach. We will use equilibrium analysis to study topics including the use of credible threats and promises, strategic use of information through signaling and screening, negotiation and bargaining, and bidding in and designing auctions. Game theory is the science of strategic interaction. The ultimate goal of this course is to enhance the student's ability to think strategically in complex, interactive situations. The examples presented in class are intended to isolate and illuminate (often in the simplest framework possible) particular aspects of strategic interaction that arise in real situations. For a broader understanding, it is necessary for the student to realize the similarities between these simple games and many situations both in business and in life. Students will participate in games against other classmates online prior to most lectures. Both fun and simple, the games illustrate general principles of behavior. Often, course readings will demonstrate the application of game theoretic principles to sports, movies, popular culture, nature, etc. While perhaps serving as a nice break from the theory, these applications have a broader goal: since many game theoretic concepts appear counterintuitive at first, having a toolbox of simple analogies and explanations will empower you to convince others of your decisions. After all, you never truly understand the material until you are able to communicate it to others.

2 READINGS Readings are available online on the course web site. These range from the whimsical to the serious. These readings may allow you to look more deeply at the material or may present concepts that will not be covered in class directly. All readings are required. At least one final exam question will be based directly on these readings. Further, an optional text is: Games of Strategy. Avinash Dixit and Susan Skeath. New York: WW Norton. We will not be referencing this text, but it may be valuable for reviewing course concepts. There are three editions available, and any will work for review. The syllabus references chapters in the first two editions, copies of which are available at the library on reserve. GRADING Your grade will depend on four case assignments, class participation, participation in experimental games, and a final exam. Group Case Write Ups 15% each Class Participation 15% You should be prepared for class and expect to be called upon without notice to discuss readings, solve a problem, or contribute to class discussion. Occasionally, a student may be swamped with work and unprepared for a class meeting or simply not wish to be called on. This is understandable. If you do not wish to be called on, simply do not use your name tent. Otherwise, name tents should be brought to and used in every class. Final Exam 25% Most of the exam will be a straightforward review of the material, closely paralleling in class problems and sample problems provided on the web site. A few questions unlike those you have seen in the examples may test your critical understanding of the material. Participation in Experimental Games 0 to 10% You will be required to participate in experimental games each week. The games are not graded but participation is required and failure to participate reduces one s grade. EXPERIMENTAL GAMES Students will find a link to online games each week from the course web site. Participation in these games is mandatory, though performance in the games does not impact the grade. Games will generally become available Thursday evening and must be played by 6:00 PM on Sunday (a different due date applies for the very first and last games). No studying or preparation is necessary prior to participating. Games generally will not require more than ten or fifteen minutes to complete. 2

3 CASE WRITE-UPS FORMAT: You have been promoted to the position of chief strategist in your corporation. Others in your company rely on you for fast, comprehensive analysis. These assignments will ask you to analyze a specific situation within a corporation and provide advice. DELIVERABLE: These memos will sometimes require analysis of data and decisions about the modeling approach you wish to take. Write a short, concise memo. Memos must be under 750 words, not including exhibits. You should briefly describe your methodology and specifically address the questions asked. While supporting tables and figures are encouraged, the upshot should be in the body of the memo. Assignments must be submitted prior to the start of the class in which they are due. Late assignments may not be accepted. GROUP FORMATION: Groups must consist of either four or five students. Groups are self-selected. However, students are strongly cautioned to form groups carefully, ensuring that the members complement each other in analytical, writing, and mathematical skills. Note below that the grading policy places heavy emphasis on good writing and strong analysis. Students should notify me of their group members as groups are formed but no later than the date in the calendar below. It is suggested that students form groups with classmates in the same section. Groups across sections are allowed; however, as due dates vary by section, the earliest due date for any group members applies to the entire group. HONOR CODE Students are bound by the Honor Code for all work completed in this course. Academic dishonesty will not be tolerated in any form. The following specific guidelines relate to this class: CASE ASSIGNMENTS must consist of the work of the group, the whole group, and nothing but the group. By placing one s name on a group assignment, a group member signifies that he or she and other named group members all contributed in substantial part to the assignment. Plagiarism includes any use of previous years materials, and is prohibited. There may be no discussion of the case with students in other course sections (except for group members) until the case is covered in all sections. EXPERIMENTAL GAMES: The value of the experimental games is diminished with prior knowledge of the game. Therefore, it is a breach of the Honor Code to discuss the content of an experimental game with another student in the course who has not yet participated, or to gain information about an experimental game in which one has not yet participated. Students may not use any prior course material and may not share course materials with future students without my prior permission. Further, the standard cautions about properly attributing cited or paraphrased material and not giving or receiving assistance on the final exam apply. Ambiguity in the honor policies is not an excuse for a violation. If you have any questions about how the Honor Code applies to specific scenarios, please discuss them with me. 3

4 GRADING CRITERIA FOR ALL GROUP DELIVERABLES Grades on all assignments depend on sophistication of analysis, relevant use of course concepts, value of the analysis to the reader, and professionalism. Each of these categories is described in detail below. Note that high grades are rare and reserved for superior, well-supported, concise memos with thoughtful argument, perfect diction, and depth of analysis. RELEVANCE (RELEVANCE OF THE TOPIC, DIFFICULTY OF THE UNDERTAKING): First and foremost, the memo must be relevant to the course material. The tools used in the analysis of the situation (game) presented in the assignment should reflect course material. SOPHISTICATION (COMPREHENSIVENESS OF THE ANALYSIS): Most cases will involve some subtleties. Careful consideration of the origins and nature of payoffs, examination of non-obvious strategies, and consideration of risks and uncertainties, are examples of factors which can make for sophisticated analysis. VALUE (VALUE TO THE RECIPIENT, QUALITY OF INTUITION, AND APPLICABILITY OF THE MEMO): Analysis should be purposeful. No amount of analytical heavy-lifting can replace clear recommendations that can be implemented by the reader. Your careful analysis must clearly motivate and convey your recommendation and the recommendation should be of value to the reader. PROFESSIONALISM: As professionals, you are all aware of the importance of strong writing skills. Letters, reports, and even short notes all indicate to others our ability to communicate. People develop opinions about our ability and work ethic based upon our written correspondence. Typographical errors, grammatical errors, misspelled words, or poor diction and writing style dramatically reduce the impact of our work no matter how excellent the content. Thus, the quality of your writing, as well as the content of your papers, plays a significant role in the grading process. A high score in professionalism implies a memo with impeccable grammar and spelling. The argument proceeds in a clear manner, is free of jargon, and is accompanied by a clear and clean physical layout and ease of reading. Write in fully formed sentences and carefully proofread the document to ensure proper grammar and diction. There is absolutely no excuse for grammar, spelling, or diction errors. Regarding style, write simply, formally and clearly. Do not use jargon! Write the memo in plain English, and consider that it may be read both by people unfamiliar with game theory and by gametheorists unfamiliar with your industry. Define all technical terms and acronyms (better yet, avoid them). When using diagrams to aid communication, make sure that their meanings are clear, and do not simply rely on game theoretic conventions. 4

5 Course Calendar Class Week Topic Text Ed1/Ed2 Games Discussed Deliverables What is Game Theory? 1 Course introduction Understanding the rules 1 / 1 2 / 2 Online Game Simultaneous Games Being dominant & Being dominated Sequential Games Looking forward - Reasoning back 4 / 4 3 / 3 Online Game 2 Online Game 3 Deadline to Form Groups Mixed Strategies The sensibility of being unpredictable Inducing Cooperation Agreeing to agree 5 / / 11 Online Game 4 Case #1 Online Game Commitment and Strategic Moves Credibility, threats, and promises Commitment and Strategic Moves Beyond the prisoner s dilemma 9 / 10 Online Game 6 Case # Incentive Pay Proper incentive alignment Signaling & Screening Strategic use of information 12 / 9 Online Game Private Value Auctions Buying, selling, bidding Common Value Auctions Sources of value 15 / 16 In-class Games & Online Game 8 Case # Bargaining and Negotiation Getting what the other guy has What good is all this stuff? How useful is game theory? 16 / 17 Online Game 9 Online Game 10 Case #4