Entry Deterrence in Game Theory
Introduction
Game theory, in this essay, means the study of strategies adopted by rational decision-makers of economic agents in specific situations, analyzing outcomes of mathematical models of conflict and cooperation (Myerson, 1991). Its basic elements include players, actions, information, strategies, payoffs, outcome and equilibrium, among which, players, strategies and payoffs are the most essential; actions and outcome are called as rules of the game (Rasmusen, 2000). The objective of the model is to establish equilibrium with the use of rules of the games.
Nash equilibrium, an important terminology in Game theory, is the situation when two or more players are involved in the game, and each player is supposed to know other players’ equilibrium strategies; players will get nothing just by changing their own strategy (Gibbons, 1992: p.8).
Entry deterrence game, as a typical example in industrial economics, can be seen in the competitive markets in real society will be regarded as an object to be discussed In the subsection, firstly, entry deterrence game will be put into four classical types of game theories for analyzing and different strategies for the players in the games will be work out by using the given models; then the use of game theory in real entry deterrence will be slightly discussed.
Model Analysis
The first situation is the entry deterrence under the static games of complete information. Suppose that there is already a monopolist company B as the incumbent in a specific industry; another company A as the entrant wants to enter this market. All the information in this market is open to A and B. B, in order to keep its profit, will try to prevent A from entering the market. There are two strategies for A to choose---to enter or to stay out; if entry occurs, there will be two choices for B---to collude or to fight. Suppose the entry costs are 10; duopoly profit---100 will be split evenly to A and B if B collude when A enters. Table 1 illustrates
Game theory, in this essay, means the study of strategies adopted by rational decision-makers of economic agents in specific situations, analyzing outcomes of mathematical models of conflict and cooperation (Myerson, 1991). Its basic elements include players, actions, information, strategies, payoffs, outcome and equilibrium, among which, players, strategies and payoffs are the most essential; actions and outcome are called as rules of the game (Rasmusen, 2000). The objective of the model is to establish equilibrium with the use of rules of the games.
Nash equilibrium, an important terminology in Game theory, is the situation when two or more players are involved in the game, and each player is supposed to know other players’ equilibrium strategies; players will get nothing just by changing their own strategy (Gibbons, 1992: p.8).
Entry deterrence game, as a typical example in industrial economics, can be seen in the competitive markets in real society will be regarded as an object to be discussed In the subsection, firstly, entry deterrence game will be put into four classical types of game theories for analyzing and different strategies for the players in the games will be work out by using the given models; then the use of game theory in real entry deterrence will be slightly discussed.
Model Analysis
The first situation is the entry deterrence under the static games of complete information. Suppose that there is already a monopolist company B as the incumbent in a specific industry; another company A as the entrant wants to enter this market. All the information in this market is open to A and B. B, in order to keep its profit, will try to prevent A from entering the market. There are two strategies for A to choose---to enter or to stay out; if entry occurs, there will be two choices for B---to collude or to fight. Suppose the entry costs are 10; duopoly profit---100 will be split evenly to A and B if B collude when A enters. Table 1 illustrates
References: Gibbons, R. (1992). A Primer in Game Theory. London: FT Prentice Hall. Myerson, R. B. (1991) Game Theory: Analysis of Conflict. Cambridge and London: Harvard University Press. Rasmusen, E. (2000). Games and Information: an Introduction to Game Theory. 3rd ed. Oxford: Basil Blackwell.