1、Chapter 2 PositioningGeorge HendrikseEconomics and Management of Organisations:Co-ordination,Motivation and Strategy Figure 2.1:Scheme of thoughtPlayersChoicesPayoffs Descriptive analysisPrescriptive analysisDegree of rationalityBehavioural hypothesesEquilibriumTestable hypothesesAdviceBehavioural a
2、ssumptionsRulesInformation structureProblem Figure 2.2:Behavioural assumptions and organisation theoriesViews of the firm Technological Contractual/judicial Psychological Sociological Biological HolisticWhat is a firm?Game theory A unified analytical structure for studying all situations of conflict
3、 and cooperationorA tool for modelling multiperson decision situationsNon-cooperative game theoryA non-cooperative game consists of 5 ingredients:1.Players2.Actions3.Payoffs4.Information structure5.Rules of the game1.Players Number of players Types Government Firm Consumer Country Student Political
4、party2.Actions/strategiesEnvironmental pollution gamePCIINNFirmGovernmentInspect?Pollute?The game treeA Node indicates that a player has to make a decision.A Branch represents a choice or action.Possible choices/actions:Firm:P and C Government:I and NStrategyA specification of an action/choice forea
5、ch possible history/contingency/situation which might occur,given theinformation structure.orSpecification of an action/choice for eachobservable history of the game.Possible strategies of the government are:(I,I)(I,N)(N,I)(N,N)Possible strategies of the firm are:P C3.Payoffs Environmental pollution
6、 game Costs of inspection 2 Benefit of pollution for firm:4 Fee for detecting pollution:5PCIINNFirmGovernmentInspect?Pollute?-1 3400-200Payoff firmPayoff GovernmentWhat will happen in the environmental pollution game?EquilibriumNash equilibrium:a payoff maximising strategy for each player,given the
7、choice of strategy of all other players.Game representations Extensive form:tree diagram Strategic form:matrixEnvironmental pollution game in strategic form Government Firm (I,I)(I,N)(N,I)(N,N)P (-1,3)(-1,3)(4,0)(4,0)C (0,-2)(0,0)(0,-2)(0,0)Government Firm (I,I)(I,N)(N,I)(N,N)P (-1,3)(-1,3)(4,0)(4,0
8、)C (0,-2)(0,0)(0,-2)(0,0)Determining NE in strategic formNash EquilibriumFirm:CGovernment:(I,N)4.Information structureFirmGovernmentEnvironmental pollution game(information set added)PCININ-140 03 0-20The oval represents an information set.Government does not know which action is taken by the firm w
9、hen it has to decide.A specification of an action for each observable history of the game or A specification of an action for each information set.StrategyWhat are the strategies of Firm and Government?Firm:PCGovernment:INGovernmentFirmINP(-1,3)(4,0)C(0,-2)(0,0)Government Firm I N P (-1,3)(4,0)C (0,
10、-2)(0,0)NE determinationConclusions Equilibrium changes when the information structure changes.Circling:it can be shown that each player will choose each strategy with a certain probability,i.e.endogenous uncertainty.Subgame perfect equilibriumTo be used when there is complete information.Extensive
11、formCNRSRS-11-1-100-41-50FrankCookie?AnnRun?Cookie extraction gameAnn Frank (R,R)(R,S)(S,R)(S,S)C(-11,-4)(-11,-4)(-1,1)(-1,1)N(-10,-5)(0,0)(-10,-5)(0,0)Nash equilibria Frank:C Ann:(S,R)and Frank:N Ann:(R,S)and Frank:N Ann:(S,S)Conclusion Almost everything can happen Concept of Nash equilibrium does
12、not always point to a unique pair of strategies There is something peculiar about NE Frank:C Ann:(S,R)Ann extracts a cookie from Frank(,i.e Frank chooses C)by threatening to run away(,i.e Ann chooses R as a response to N by Frank which is represented by the strategy (.,R).No.If Frank chooses N,than
13、Ann earns -5 when she chooses R;0 when she chooses S.Is this threat by Ann credible?Subgame perfect equilibriumMotivation:An equilibrium concept which does not allow non-credible threats.Cookie extraction gameSPE is most easily determined by using the extensive form.Solution method:Start at the bott
14、om of the tree and work your way upward(Backward induction).CNRSRS-11-1-100-41-50FrankCookie?AnnRun?SPE:Frank:N;Ann:(S,S)Examples of rules:Sport Payment schemes Elections Contracts Corporate charters 5.RulesTiming of decisions Decisions are depicted as simultaneous when either the other choice can n
15、ot be observed or the observation lag is long.Decisions are depicted as sequential when the time between strategy choices is sufficiently long.McKelvey-theoremEvery possible outcome of a democratic decision process can be established by an appropriate choice of the layers in a decision procedure.Management implications of non-cooperative game theoryChange one or more of the 5 ingredientsin order to obtain a more attractive equilibrium.
