Airbus vs. Boeing.ppt

8/14/2019 Airbus vs. Boeing.ppt

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Game Theory

It is true that life must beunderstood backward, but

it must be lived forward.

- Sren Kierkegaard

Mike ShorLecture 4


2/33

Review

Understanding the outcomes of games

Sometimes easy

Dominant strategies

Sometimes more challenging

I know that you know

What if a game is sequential?

Market entry

Mike Shor

Game Theory & Business Strategy2


3/33

Very Large Airplanes:Airbus vs. Boeing

Airbus lacked a jumbo jet: The problem is the monopoly of the 747

They have a product. We have none. - Airbus Executive

Initiated plans to build a super-jumbo jet

Industry feasibility studies: Room for at most one megaseater

Boeing preemption: Boeing, the worlds top aircraft maker, announced

it was building a plane with 600 to 800 seats, thebiggest and most expensive airliner ever.

- BusinessWeek, 1993

Mike Shor



4/33

Sequential Games

Mike Shor


The Game

Airbus

Boeing $4 billion,

$4billion

$0.3 billion,$3 billion

$1 billion,$1billion

$0,$0


5/33

Looking Forward

Airbus makes the first move:Must consider how Boeing will respond

If stay out:

Boeing stays outMike Shor


Boeing

$0billion

$1 billion


6/33

Looking Forward

Airbus makes the first move:Must consider how Boeing will respond

If enter:

Boeing accommodates, stays outMike Shor


Boeing

$3billion

$4 billion


7/33

And Reasoning Back

Now consider the first move:

Only ( In, Out ) is sequentially rational

In is not credible (for Boeing)

Mike Shor


Airbus

Boeing

$0,$0

out $0.3 billion,$3 billion

out


8/33

Boeing, the worlds top aircraft maker,announced it was building a plane with 600 to800 seats, the biggest and most expensiveairliner ever.

- BusinessWeek, 1993

Airbus vs. BoeingWhat a Difference Seven Years Make

Mike Shor



9/33

Solving Sequential Games

Thinking backwards is easy in game trees

Start at the end and trim the tree to the present

Thinking backwards is challenging in practice

Outline:

Strategic moves in early rounds

The rule of three (again)

Seeing the end of the game

Mike Shor



10/33

Voting Revisited

Gore v. Bush

before the U.S. Supreme Court

Recall member preferences:

4 (B>G>R) 3 (G>R>B) 2 (R>B>G)

Majority rule results:

Bbeats G ; Gbeats R ; Rbeats B

Voting results (example):

Rbeats G then winner versus B BMike Shor



11/33

Voting as a Sequential Game

Mike Shor


R vs. G

B vs. R

B vs. G

B

R

G

B


12/33

Looking Forward

Mike Shor


A majority prefers R to B

A majority prefers B to G

B vs. R

B vs. G

B

R

G

B


13/33

And Reasoning Back

Three judges prefer G to R to B.

How should they vote in the first round?

Mike Shor


R vs. G

B vs. R

B vs. G

R

B


14/33

What Happened?

Gore supporters have preferences

Gore > Remand > Bush

First round vote between Remand and Gore

Gore supporters prefer Gore

But a vote for Gore is in effecta vote for Bush!

So Gore supporters vote for remand.

Guarantee themselves second best choice

Thinking forwardmisses chance for strategic voting

Thinking forwardleads us to pick the wrong game

Mike Shor



15/33

Sequential Rationality

Mike Shor


COMMANDMENT

Look forward and reason back.

Anticipate what your rivals will dotomorrow

in response to your actionstoday


16/33

Examples of Strategic Voting

Not necessarily good to vote your true preferences

Amendments to make bad bills worse

Crossing over in open primaries

Centrist voting in primaries

Outcome is still predetermined: Bbeats G then winner versus R

Bbeats R then winner versus G

Gbeats R then winner versus B

Mike Shor



17/33

Accommodating aPotential Entrant

Do you enter?

Do you accommodate entry?

What if there are fifty potential entrants?

Mike Shor



18/33

SurvivorImmunity Challenge

There are 21 flags

Players alternate removing 1, 2, or 3 flags

The player to take the last flag wins

Mike Shor



19/33

Sequential Games

You have a monopoly market in every state

There is one potential entrant in each state

They make their entry decisions sequentially Florida may enter today

New York may enter tomorrow

etc.

Each time, you can accommodate or fight

What do you do the first year?

Mike Shor



20/33

The Game

Mike Shor


E1

M

E2

M

E3


21/33

Looking Forward

In the last period:

No reason to fight final entrant, thus

( In,Accommodate )

Mike Shor


E

M

$0, $100 + previous

50, 50 + previous

50, 50 + previous


22/33

And Reasoning Back

The Incumbent will not fight the last entrant But then, no reason to fight the previous entrant

But then, no reason to fight the first entrant

Only one sequential equilibriumAll entrants play In

Incumbent playsAccommodate

But for long games, this is mostly theoretical

People see the end two to three periods out!

Mike Shor



23/33

Game Theory

Example

Sequential Entry


24/33

Market Opportunity Analysis

Assesses the potential of a geographic

market for a specific set of products,providing a prioritization of market

coverage voids and recommending

market entry strategies.

Mike Shor



25/33

Prioritizationof Market Coverage

Mike Shor


400SBCs

700

SBCs

Break even point: 300 SBCs


26/33

Extended Market Analysis

If enter 400 SBC market: Next entrant, to break even,

must expect market share of 300/400

Must expect market share of 75%

If enter 700 SBC market: Next entrant, to break even,

must expect market share of 300/700

Must expect market share of 43%

Real decision:All of 400 or half of 700

Mike Shor



27/33

Breakfast Cereals

A small sampling of the Kelloggs portfolio

Mike Shor



28/33

Breakfast Cereals

Mike Shor


product development costs:$1.2M per product

600

500

400

300

200

100

000

less

sweet

more

sweet

1 2 3 4 5 6 7 8 9 10 11

sales

(in

thousa

nds)


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First Product Entry

Mike Shor


Profit = 5(600) 1200 = 300600

500

400

300

200

100

000

lesssweet

moresweet

1 2 3 4 5 6 7 8 9 10 11

SCENARIO 1

sales

(in

thousa

nds)


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Second Product Entry

Mike Shor


600

500

400

300

200

100

000

lesssweet

moresweet

1 2 3 4 5 6 7 8 9 10 11

Profit = 2 x 300 = 600SCENARIO 2

sales

(in

thousa

nds)


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Third Product Entry

Mike Shor


600

500

400

300

200

100

000

lesssweet

moresweet

1 2 3 4 5 6 7 8 9 10 11

Profit = 300 x 3 240 x 2 = 420SCENARIO 3

sales

(in

thousa

nds)


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Competitor Enters

Mike Shor


600

500

400

300

200

100

000

lesssweet

moresweet

1 2 3 4 5 6 7 8 9 10 11

Profit = 300 x 2 - 240 = 360SCENARIO 4

sales

(in

thousa

nds)


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Summary

Thinking forwardmisses chancesto make money

Make sure to see the gamethrough to the logical end

Dont expect others to seethe end until it is close

The rule of three stepsMike Shor

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Airbus vs. Boeing.ppt