Faculty
Professor Robert G. Hansen
Objectives
Course Overview
Strategic situations exist when the right decision for one person depends upon the actions taken by another. Decision-making in strategic situations is necessarily complicated because one must take into account the actions taken or likely to be taken by others -- but these other individuals will themselves be concerned about the actions that we will take. Most business decisions are likely to be made in this context -- what is competition all about, after all?
The objective of this course is to give a practical yet rigorous introduction to game theory, which is a branch of economics devoted to the study of strategic situations. The use of game theory has exploded in recent years in economics, to the point where game theoretic models are now the norm in microeconomics. The use of game theory has also trickled down into some of the more applied areas of economics, for instance in finance and in marketing. And there are now several concerted efforts to bring game theory into the managerial world. This will be our focus also, hence the title of the course. One should be forewarned, however, that game theory is intensively analytical, with considerable use of mathematics. It is my belief that analytical rigor is a necessity when dealing with strategic situations, for it is too easy to reach conclusions that are not logically correct. But it is also my belief that one can often present rigorous material in an intuitively appealing fashion, and in a way that is accessible to anyone who is willing to put forth the effort to learn it. The bottom line is that while we will see some cases in this course, we will also see a fair amount of math.
This course takes very seriously the ideas of rationality and equilibrium as principles for thinking about not only how one should behave, but how people do behave. Of course, there are many times when complexity of a situation, or irrational behavior, overcome any tendency to a rational equilibrium. There is also clearly an opportunity to use the art of strategic behavior to influence others’ beliefs and actions (some people are really good at threatening, pleading, fooling, etc.!). My stance on this is that we first want to establish the base case of a rational approach. Having an understanding of that base case rational prediction/prescription, we can then bring in other factors that might cause us to alter our analysis.
Requirements
Your grade will be based on class participation (40%), including possible in-class quizzes, and a final exam (60%). The exam will be open-book, open-note. It will cover material similar to that covered in class. I will distribute a sample exam from the past.
Materials
Please note that I send out weekly emails that supplement this syllabus and give you more guidance for preparation. Those emails, as well as discussions in class about the next session, are important inputs for your preparation.
The ASSIGNED TEXT for this course is:
Dixit & Nalebuff, THE ART OF STRATEGY (Norton; Edition 1, 2008) ISBN: 978-0-393-06243-4 (hardcover)
The book will be available at Wheelock Books and Dartmouth Bookstore (or at your favorite online bookseller).
There will also be a course packet with cases and readings.
I will put several copies of Games of Strategy, by Avinash Dixit and Susan Skeath ON RESERVE in Feldberg, and certain chapters from this text are referenced on the syllabus. They are optional readings, but if you are really interested in these topics, this book is a really good reference. An excellent internet resource that you can explore on your own is www.gametheory.net.The book Art of Strategy by Dixit and Nalebuff is a completely new version of their classic, Thinking Strategically. I have used that latter book in previous years. I have always said that I think every MBA should read Thinking Strategically at least once. From what I can tell, the new book is even better – every MBA should probably read it at least twice. Not all of the chapters of the text are referenced below. That should not stop you from reading them at some point!
Tuck Honor Code
I see no special Honor Code issues for this course. As always, if you have a question concerning academic honor, please ask me. The Final Exam is a take-home exam and I expect your sense of honor to make you abide by the time limit. Also, if it were to happen that you find an answer to a question on the exam either from old notes or from the internet (I do write new questions for the exams, but I am always afraid that the question will have appeared somewhere else), I would expect you to note that on your exam. I will ask you to sign the exam stating that you have abided by all aspects of the Honor Code.
Class Participation
Reflecting the relatively heavy weight on class participation, I expect to have everyone well prepared for class. I will do my best to clarify what you should read and prepare before class. If you miss a quiz, you will be able to make it up, but I reserve the right to penalize unexcused absences.
Grading
Your grade will be based on class participation (40%) and a final exam (60%). The exam will be open-book, open-note. It will cover material similar to that covered in class. I will distribute a sample exam from the past.
Schedule
Class 1
Thurs. 2/5
Introduction: Basic Concepts, Solutions Concepts, and Some Introductory Examples
(a) D&N, Chapters Introduction and Chapter 1
Optional: (b) Dixit and Sneath, Chapter 2 (on reserve in Feldberg)
(c) Airlines Problem - Tuck (to be distributed)
(d) "Genius and Darkness," Byline by Marcia Bartusiak, The Boston Globe, July 5, 1998 (Permission to use granted by author)
Book Reviews of A Beautiful Mind by Sylvia Nassar:
"Mathematics to Madness, and Back," Byline by David Goodstein, The New York Times, June 11, 1998. (TuckStreams Link):
(e) Sylvia Nassar, “The Lost Years of a Nobel Laureate,” New York Times Books, 11/13/94. (TuckStreams Link):
Class 2
Wed. 2/11
Cournot means quantity; Bertrand means prices. Models of oligopolistic competition, of Interest by Themselves and Great Examples of Simultaneous Move Games.
(a) D&N, Chapters 3 and 4. Note we are skipping Chapter 2 for now, but will return to it. Also, Chapter 4 has a lot on the Prisoner’s Dilemma. We will cover that just a bit now, as an introduction to the idea of equilibrium, and return to it for much more discussion on the last day.
(b) Besanko, Dranove and Shanley, Economics of Strategy, New York, NY: John Wiley & Son, Inc., 2000: Chapter 7 (“Competitors and Competition”) pp. 249-260
AND
Besanko, Dranove and Shanley, Economics of Strategy, New York, NY: John Wiley & Son, Inc., 2000: Chapter 8 (“Strategic Commitment”), pp. 263-285.
(Permission to copy granted by publisher via Copyright Clearance Center, Inc.)
Optional: (c) If interested in an advanced treatment: Bulow, Geonakoplus, and Klemperer, “Multimarket Oligopoly: Strategic Substitutes and Complements,” Journal of Political Economy, 1985, Vol. 93 (pp. 488-511) (TuckStreams Link):
Optional: (d) Dixit and Sneath, Chapter 4, Chapter 5 (pp. 124-128)(on reserve in Feldberg)
Class 3
Thurs. 2/12
An Electric Equilibrium: A Nice Example of a Simultaneous Move Equilibrium in an Industry Investment Context
Guest Lecturer: Scott G. Fisher, The NorthBridge Group
Read: “Capacity Expansion in the Electric Industry” by Scott G. Fisher and Evan Koch - (Permission to use granted by author.)
Class 4
Wed. 2/18
Going, going gone! Auctions I, Private Values
(a) D&N, Chapter 10
Optional: (b) Dixit and Sneath, Chapter 16 (on reserve in Feldberg)
(c) Klemperer, "Auction Theory: A Guide to the Literature," 2001, Journal of Economic Surveys
(TuckStreams Link):
(d) Roth, A.E., Ockenfels, A., (2002). “Last-minute bidding and the rules for ending second-price auctions: Evidence from eBay and Amazon auctions on the internet. American Economic Review, Vol. 92, pp. 1093-1103.
(TuckStreams Link):
(e) Google’s ad auctions explained:See TuckStreams Link:
(f) Varian, Hal R., “Position Auctions,” International Journal of Industrial Organization, December 2007 (TuckStreams Link):
Class 5
Thurs. 2/19
Going, going gone II: Common value auctions, and applications
(a) Capen, Clapp and Campbell, “Competitive Bidding in High Risk Situations,” Journal of Petroleum Technology, June 1971, pp. 641-653. (Permission to copy granted via Copyright Clearance Center, Inc.)
(b) Bidding Under Uncertainty - Tuck Case, 2007.
(c) Bajari, Patrick and Hortacsu, Ali, “The Winner’s Curse, Reserve Prices, and Endogenous Entry: Empirical Insights from eBay Auctions, The Rand Journal of Economics, Mount Morris: Summer 2003, Vol.34, Iss. 2; pg. 329. (TuckStreams Link):
Class 6
Wed. 2/25
Racing with John Nash: R&D Races as an Example of Sequentially Played Games
(a) D&N, Chapters 2 (going back to that one now) and a good time to re-read Chapter 4.
(b) Case: An R&D Race (HBS 9-190-108)
(c) Case: The Race to Develop Human Insulin (HBS 9-191-121)
(d) Examples of such races: See TuckStreams Link:
Class 7
Thurs. 2/26
The Best Way to Fool Others is to Fool Yourself: Mixed-Strategy Equilibria and the War of Attrition
(a) Case: Hold or Fold: The War of Attrition (HBS 9-794-092)
(b) Case: British Satellite Broadcasting vs. Sky Television (HBS 9-794-031)
(c) D&N, Chapter 5
(d) Palacios-Huerta, “Professionals Play MiniMax,” Review of Economic Studies, 70, 2003, pp. 395-415. TuckStreams Link below:
(Discussed in laypersons’ language at “World Cup Game Theory,” Tim Harford)See TuckStreams Link below:
Class 8
Wed. 3/5
What kind of person would do a thing like that? Games of Information: Signaling, screening, and generally making inferences about “types”.
(a) D&N, Chapter 8.
Optional: (b) Dixit and Sneath, Chapter 9. (on reserve in Feldberg)
(c) Reiley, David H.; Urbancic, Michael B.; and Walker, Mark, “Stripped-down Poker: A Classroom Game with Signaling and Bluffing,” Working Paper - February 2005, pp. 1-18. (TuckStreams Link):
(d) Rebitzer, James, Lowell J. Taylor. "Rat Race Redux: Adverse Selection in the Determination of Work Hours in Large Law Firms," The American Economic Review, June 1996. (TuckStreams Link):
(e) Fernando Vega-Redondo and Oren Hasson, “A Game-theoretic Model of Predator-Prey Signaling”, Journal of Theoretical Biology, 1993, Vol. 162, pp. 309-319. (TuckStreams Link):
(f) Robert Pool, “Putting Game Theory to the Test” , Science , New Series, Vol. 267, NO. 5204 (Mar. 17, 1995), pp. 1591-1593. (TuckStreams Link):
Class 9
Thurs. 3/6
Hawks and Doves: Competition vs. cooperation and the Prisoners’ Dilemma
(a) D&N, Chapter 3
(b) Axelrod and Hamilton, “The Evolution of Cooperation”, Science (New Series), Vol. 211, No. 4489 (Mar., 1981), pp. 1390-1396 (TuckStreams Link):
(c) Gibbons, Game Theory for Applied Economists, Princeton University Press, 1972, Chapter 4 (pp. 224-231) (Permission to copy granted by publisher via Copyright Clearance Center, Inc.)
(d) Grossman, Wendy M., “New Tack Wins Prisoner’s Dilemma,” WIRED NEWS, 2004-10-13 (12:27:00.0), pp. 1-2.
(TuckStreams Link):
