Industrial organization and strategy

It all started with a collaboration

with a competitor: Nintendo. In

the end of the 1980s Sony

proposed a collaboration to

Nintendo (Nintendo was already

in the videogames market) to

create a new console by using

the graphic capability of a

workstation with Sony’s CD-ROM drive, sony’s idea was to develop a new console that was

using one of the most important sony’s product (CD reader), while Nintendo was using the

CARTRIDGE (la memoria sd). In 1992 Nintendo quitted the collaboration because the

cartridge had better graphic performance because it provided a faster connection with the

console (on the other hand the CD was easier to share). So Sony was left alone and

developed the playstation which

was very successful for 2 reasons:

-scope economy (Sony already

produced Cd-ROM players)

-Positive network externalities: since

Cd-ROMs were easier to share, this

pushed a lot of games developers to

develop games, which pushed a lot of consumers to play those games because there were a

lot of games→ this is circolo vizioso, the advantages of the network is the network itself.

-Rules→a) TEMPORARY

SHCEDULE: tipo la prima mossa la fa il

player A, la seconda il player B b) the

type of action a player can do c) the

information a player holds

-Outcome: the result of a move

-Payoff: the result of a strategy

Based on a) Temporary

schedule and c) the

information that a player

holds, we can classify games

in:

-static/complete,

-dynamic/complete,

-static/incomplete,

-dynamic/incomplete.

STATIC GAME: static means players are playing simultaneously (not one after the other one)

and each time they play they have complete information.

DYANAMIC GAME: players play sequentially: first A, then B, then A, then B and so on.

ASSUMPTIONS:

-RATIONALITY: players play in

order to optimize the payoff

-COMMON KNOWLEDGE: the

players know the rules and

structure (this means that the

companies know how market

works)

-I is the total number of

players

-i-th is the i-esima strategy of

the player i, and Si is the total

strategy set.

-pigreco(S) is the payoff for

the strategy S by player i. With

S={s1,s2,s3} we mean a vector

with all the moves of a player in his strategy set.

-MATRIX OF THE PAYOFF→ We have 2 players (easiest

case), first player in row (R),

second player in columns (C).

Player 1 can do 4 moves

(R1,R2,R3,R4) and player 2 can

do 4 moves (C1,C2,C3,C4).

The nymbers inside the matrix

are the payoff, the first number

is the payoff for player 1 and second number is payoff for player 2, so→if player 1 does move

R3 and player 2 does move C2, player 1 earns 2 and player 2 earns 5.

What does it mean TO SOLVE A

GAME? It means to find an

equilibrium, because when

companies are in equilibrium

they have no interest in

switching from that situation.

BEST RESPONSE: the best

strategy a player can use

considering the other players’

set of strategy.

The equation means that: the payoff of player i’s strategy Si, related to the other players’

strategy S-i IS HIGHER >> than the payoff of of player i’s strategy S’i related to the other

players’ strategy S-i. of course the other players’ strategy must be the same, if they change

strategy, the best response changes. If

-PLAYER 2 plays C1, best

response is R3 (7 is the highest for

that column)

-PLAYER 2 plays C2, best

response is R2 (3 is higher for that

column) and so on…..

The movie (a beautiful mind)

shows that if all the guys flirt with

the blonde girl she will reject

each of them and then if they

move to the girl’s friends they will

reject them as well. Instead, if

they flirt with different girls they

have higher chance to win. This is

the concept of NASH

EQUILIBRIUM: a strategic profile where each player’s strategy is a best response to the

strategies of all the other players. If we move from that equilibrium this will for sure worsen

some other player situation so no one has interest in moving from this equilibrium. So we

need to find the best response that is the best response for every player in the game.

The payoff when player i is

playing the best response

s*i and also all the other

players are playing their

best response s*-i IS

HIGHER >>than the payoff

of when player i plays a

different strategy s’i and the

rest of the players still play

the best response s*-i. To find nash equilibrium

we have to find the best

response for both of the

players, so we need to

repeat what we did 3 slides

ago for both of the players.

It’s shown in the slide on

the left.

We can see that we find a

situation that is common

to both of the players: PLAYER 1 PLAYS R2 AND PLAYER 2 PLAYS C2. THIS IS THE NASH

EQUILIBRIUM.

We can have 2 special situations: 2 equilibrium and 0 equilibirum→

WE CAN HAVE 2 NASH

EQUILIBRIUM: in this case, a

couple has to decide where to

go: soccer or ballet. There are 2

equilibrium:

-SOCCER-SOCCER

-BALLET-BALLET

How we can solve it? We should

consider a larger range of time: if

we know that last weekend they went to the soccer match, this weekend we can assume that

this time they will go to the ballet→ this is a way to solve this equilibrium.