PM7e_ab.az.ch13PindyckRubinfeld_Microeconomics_Ch13

7/23/2019 PM7e_ab.az.ch13PindyckRubinfeld_Microeconomics_Ch13

http://slidepdf.com/reader/full/pm7eabazch13pindyckrubinfeldmicroeconomicsch13 1/42

Fernando & YvonnQuijano

Prepared by:

Game Theoryand Competitive

Strategy

13

C H A

P

T E

R

Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.



C h a p t e r 1 3 : G a m e

T h e o r y a n d C o m p e

t i t i v e S t r a t e g y

2 of 42Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.

CHAPTER 13 !T"#$E

().( *a#ing and +trategic ecisions

().2 o#inant +trategies

().) The -ash Euiibriu# Re/isited

(). Repeated *a#es

().1 +euentia *a#es

(). Threats, Co##it#ents, and Credibiity

().' Entry eterrence

().3 Auctions







*A"I-* A- +TRATE*IC ECI+I4-+().(

●game +ituation in 5hich payers6participants7 #a$e strategic decisionsthat ta$e into account each other8s actionsand responses.

●payoff aue associated 5ith a possibeoutco#e.

●%trategy Rue or pan o& action &orpaying a ga#e.

●optima& %trategy +trategy that#a:i#i;es a payer8s e:pected payo&&.

If I believe that my competitors are rational and act to maximize their

own payoffs, how should I take their behavior into account when making

my decisions?








●'ooperative game *a#e in 5hichparticipants can negotiate bindingcontracts that ao5 the# to pan <ointstrategies.

●non'ooperative game *a#e in 5hichnegotiation and en&orce#ent o& bindingcontracts are not possibe.

-oncooperati/e /ersus Cooperati/e *a#es

It is essential to understand your opponent’s point of view and to deduce

his or her likely responses to your actions.






( of 42Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.


-oncooperati/e /ersus Cooperati/e *a#es

Ho) to *+y a ,o&&ar *i&&

A doar bi is auctioned, but in an unusua 5ay. The highest bidderrecei/es the doar in return &or the a#ount bid.

Ho5e/er, the second=highest bidder #ust aso hand o/er the a#ount

that he or she bid>and get nothing in return.If you were playing this game, how much would you bid for the dollar

bill?






- of 42Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.


?ou represent Co#pany A, 5hich is considering acuiringCo#pany . ?ou pan to o&&er cash &or a o& Co#pany 8s shares, but you areunsure 5hat price to o&&er. The /aue o& Co#pany depends on the outco#e o&a #a<or oi e:poration pro<ect.

I& the pro<ect succeeds, Co#pany 8s /aue under current #anage#ent coud beas high as @(00%share. !ompany will be worth "# percent more under the

management of !ompany A. I& the pro<ect &ais, Co#pany is 5orth @0%shareunder either #anage#ent. This o&&er #ust be #ade now$before the outco#e o&the e:poration pro<ect is $no5n.

%ou &!ompany A' will not know the results of the exploration pro(ect when

submitting your price offer, but !ompany will know the results when deciding

whether to accept your offer. Also, !ompany will accept any offer by !ompany

A that is greater than the &per share' value of the company under currentmanagement.

?ou are considering price o&&ers in the range @0%share 6i.e., #a$ing no o&&er at a7to @(10%share. )hat price per share should you offer for !ompany ’s stock?

The typica response>to o&&er bet5een @10 and @'1 per share>is 5rong. The

correct ans5er to this probe# appears at the end o& this chapter.






. of 42Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.

4"I-A-T +TRATE*IE+().2

●dominant %trategy +trategy that is

opti#a no #atter 5hat an opponent does.

+uppose ir#s A and * se co#peting products and are deciding5hether to underta$e ad/ertising ca#paigns. Each &ir# 5i bea&&ected by its co#petitor8s decision.






/ of 42Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.

4"I-A-T +TRATE*IE+().2

●e0+i&ibri+m in dominant %trategie%

4utco#e o& a ga#e in 5hich each &ir# isdoing the best it can regardess o& 5hat itsco#petitors are doing.

Bn&ortunatey, not e/ery ga#e has a do#inant strategy &or each payer. Tosee this, et8s change our ad/ertising e:a#pe sighty.






of 42Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.

THE -A+H EBIDIRIB" REI+ITE().)

+ominant trategies- I8# doing the best I can no matter what you do.?ou8re doing the best you can no matter what I do.

ash /0uilibrium- I8# doing the best I can given what you are doing .?ou8re doing the best you can given what I am doing .

The Prod+'t Choi'e Prob&em

T5o brea$&ast cerea co#panies &ace a #ar$et in 5hich t5o ne5/ariations o& cerea can be success&uy introduced.








The *ea'h "o'ation Game

?ou 6% 7 and a co#petitor 6! 7 pan to se so&t drin$s on a beach.

I& sunbathers are spread e/eny across the beach and 5i 5a$ to the cosest /endor, the t5o o& you5i ocate ne:t to each other at the center o& the beach. This is the ony -ash euiibriu#.

I& your co#petitor ocated at point A, you 5oud 5ant to #o/e unti you 5ere <ust to the e&t, 5here youcoud capture three=&ourths o& a saes.

ut your co#petitor 5oud then 5ant to #o/e bac$ to the center, and you 5oud do the sa#e.

*ea'h "o'ation Game

ig+re 131








F"a:i#in +trategies

The concept o& a -ash euiibriu# reies hea/iy on indi/iduarationaity. Each payer8s choice o& strategy depends not ony on itso5n rationaity, but aso on the rationaity o& its opponent. This can bea i#itation.

●ma5imin %trategy +trategy that#a:i#i;es the #ini#u# gain that can beearned.








"a:i#in +trategies

I& ir# ( is unsure about 5hat ir# 2 5i do but can assignprobabiities to each &easibe action &or ir# 2, it coud insteaduse a strategy that maximizes its expected payoff.

6a5imi7ing the E5pe'ted Payoff

The Pri%oner%8 ,i&emma

Ghat is the -ash euiibriu# &or the prisoners8 die##a








F"i:ed +trategies

In this ga#e, each payer chooses heads or tais and the t5opayers re/ea their coins at the sa#e ti#e. I& the coins #atch,

Payer A 5ins and recei/es a doar &ro# Payer *. I& the coins donot #atch, Payer * 5ins and recei/es a doar &ro# Payer A.

●p+re %trategy +trategy in 5hich a payer #a$es aspeci&ic choice or ta$es a speci&ic action.

6at'hing Pennie%

●mi5ed %trategy +trategy in 5hich a payer #a$es a rando# choice a#ong

t5o or #ore possibe actions, based on a set o& chosen probabiities.








F"i:ed +trategies

i# and oan 5oud i$e to spend +aturday night together but ha/edi&&erent tastes in entertain#ent. i# 5oud i$e to go to the opera,but oan pre&ers #ud 5resting.

The *att&e of the Se5e%






1( of 42Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.

REPEATE *A"E+().

Ho5 does repetition change the i$ey outco#e o& the ga#e

● repeated game *a#e in 5hich

actions are ta$en and payo&&srecei/ed o/er and o/er again.






1- of 42Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.

REPEATE *A"E+().

+uppose the ga#e is infinitely repeated . In other 5ords, #yco#petitor and I repeatedy set prices #onth a&ter #onth, forever.

Gith in&inite repetition o& the ga#e, the expected gains &ro#cooperation 5i out5eigh those &ro# undercutting.

● tit9for9tat %trategy Repeated=ga#estrategy in 5hich a payer responds in$ind to an opponent8s pre/ious pay,cooperating 5ith cooperati/eopponents and retaiating against

uncooperati/e ones.

Tit9for9Tat Strategy

#nfinite&y Repeated Game






1. of 42Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.

REPEATE *A"E+().

inite $+mber of Repetition%

-o5 suppose the ga#e is repeated a finite nu#ber o& ti#es>say, #onths. I& #y co#petitor 6ir# 27 is rationa and believes that I am

rational, he 5i reason as &oo5sJ

Kecause ir# ( is paying tit=&or=tat, I 6ir# 27 cannot undercut>that is,

until the last month. I should undercut the ast #onth because then I can#a$e a arge pro&it that #onth, and a&ter5ard the ga#e is o/er, so ir# (cannot retaiate. There&ore, I 5i charge a high price unti the ast #onth,and then I 5i charge a o5 price.L

Ho5e/er, since I 6ir# (7 ha/e aso &igured this out, I aso pan to chargea o5 price in the ast #onth. ir# 2 &igures that it shoud undercut andcharge a o5 price in the ne:t=to=ast #onth.

And because the sa#e reasoning appies to each preceding #onth, thega#e unravels- The ony rationa outco#e is &or both o& us to charge ao5 price e/ery #onth.






1/ of 42Copyright © 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.

REPEATE *A"E+().

Tit9for9Tat in Pra'ti'e

+ince #ost o& us do not e:pect to i/e &ore/er, the unra/eing argu#ent5oud see# to #a$e the tit=&or=tat strategy o& itte /aue, ea/ing us stuc$in the prisoners8 die##a. In practice, ho5e/er, tit=&or=tat can so#eti#es5or$ and cooperation can pre/ai.

There are t5o pri#ary reasons."ost #anagers don8t $no5 ho5 ong they 5i be co#peting 5ith theirri/as, and this aso ser/es to #a$e cooperati/e beha/ior a goodstrategy.

"y co#petitor #ight ha/e so#e doubt about the e:tent o& #y

rationaity.

In a repeated ga#e, the prisoners8 die##a can ha/e a cooperati/eoutco#e.







REPEATE *A"E+().

A#ost a the 5ater #eters sod in the Bnited +tatesha/e been produced by &our A#erican co#panies.Roc$5e Internationa has had about a )1=percent shareo& the #ar$et, and the other three &ir#s ha/e togetherhad about a 10= to 11=percent share.

"ost buyers o& 5ater #eters are #unicipa 5aterutiities, 5ho insta the #eters in order to #easure 5aterconsu#ption and bi consu#ers accordingy.

Btiities are concerned #ainy that the #eters beaccurate and reiabe. Price is not a pri#ary issue, and

de#and is /ery ineastic.

ecause any ne5 entrant 5i &ind it di&&icut to urecusto#ers &ro# e:isting &ir#s, this creates a barrier toentry. +ubstantia econo#ies o& scae create a secondbarrier to entry.

The &ir#s thus &ace a prisoners8 die##a. Can







REPEATE *A"E+().

In "arch (93), A#erican Airines proposed that a airinesadopt a uni&or# &are schedue based on #ieage. The rateper #ie 5oud depend on the ength o& the trip, 5ith theo5est rate o& (1 cents per #ie &or trips o/er 2100 #ies andthe highest rate, 1) cents per #ie, &or trips under 210 #ies.

Ghy did A#erican propose this pan, and 5hat #ade it soattracti/e to the other airines

The ai# 5as to reduce price co#petition and achie/e acousi/e pricing arrange#ent. i:ing prices is iega. Instead,the co#panies 5oud i#picity &i:

prices by agreeing to use the sa#e &are=setting &or#ua.

The pan &aied, a /icti# o& the prisoners8 die##a.

Pan A#, 5hich 5as dissatis&ied 5ith its s#a share o& the B.+.#ar$et, dropped its &ares. A#erican, Bnited, and TGA, a&raido& osing their o5n shares o& the #ar$et, uic$y dropped their

&ares to #atch Pan A#. The price=cutting continued, and&ortunatey &or consu#ers, the pan 5as soon dead.







+EBE-TIAD *A"E+().1

As a si#pe e:a#pe, et8s return to the product choiceprobe#. This ti#e, et8s change the payo&& #atri: sighty.

●%e0+entia& game *a#e in 5hich

payers #o/e in turn, responding toeach other8s actions and reactions.







+EBE-TIAD *A"E+().1

●e5ten%ive form of a gameRepresentation o& possibe #o/es ina ga#e in the &or# o& a decision tree.

The E:tensi/e or# o& a *a#e

Prod+'t Choi'e Game in E5ten%ive orm

ig+re 132




T h e o r y a n d C o m p e t i t i v e S t r a t e g y


+EBE-TIAD *A"E+().1

The Ad/antage o& "o/ing irst






THREAT+, C4""IT"E-T+, A- CREIIDIT?().

+uppose ir# ( produces persona co#puters that canbe used both as 5ord processors and to do other tas$s.ir# 2 produces ony dedicated 5ord processors.

E#pty Threats







Race Car "otors, Inc., produces cars, and ar 4ut Engines, Dtd.,produces speciaty car engines.

ar 4ut Engines ses #ost o& its engines to Race Car "otors, and a&e5 to a i#ited outside #ar$et.

-onetheess, it depends hea/iy on Race Car "otors and #a$es itsproduction decisions in response to Race Car8s production pans.

Co##it#ent and Credibiity







+uppose ar 4ut threatens to produce big engines no #atter 5hat RaceCar does. I& Race Car beie/ed ar 4ut8s threat, it 5oud produce bigcarsJ 4ther5ise, it 5oud ha/e troube &inding engines &or its s#a cars.

ar 4ut can #a$e its threat credibe by /isiby and irre/ersiby reducingso#e o& its o5n payo&&s in the #atri:, thereby constraining its o5n

choices.

ar 4ut #ust reduce its pro&its &ro# s#a engines. It #ight do this byshutting down or destroying some of its small engine production capacity.








e/eoping the right $ind o& reputation can aso gi/e one a strategicad/antage.

+uppose that the #anagers o& ar 4ut Engines de/eop a reputation&or being irrationa>perhaps do5nright cra;y.

They threaten to produce big engines no #atter 5hat Race Car "otorsdoes.

-o5 the threat #ight be credibe 5ithout any &urther actionM a&ter a,you can8t be sure that an irrationa #anager 5i a5ays #a$e a pro&it=

#a:i#i;ing decision.In ga#ing situations, the party that is $no5n 6or thought7 to be a ittecra;y can ha/e a signi&icant ad/antage.


The Ro&e of Rep+tation







4ur discussion o& co##it#ent and credibiity aso appies to bargainingprobe#s. The outco#e o& a bargaining situation can depend on theabiity o& either side to ta$e an action that aters its reati/e bargainingposition.

Consider t5o &ir#s that are each panning to introduce one o& t5o

products 5hich are co#pe#entary goods.

argaining +trategy







+uppose that ir#s ( and 2 are aso bargaining o/er a second issue>5hether to <oin a research consortiu# that a third &ir# is trying to &or#

argaining +trategy







Ho5 did Ga="art +tores succeed 5here others &aiedThe $ey 5as Ga="art8s e:pansion strategy.

The con/entiona 5isdo# hed that a discount storecoud succeed ony in a city 5ith a popuation o&

(00,000 or #ore. +a# Gaton disagreed and decidedto open his stores in s#a +outh5estern to5ns.

The stores succeeded because Ga="art had createdKoca #onopoies.L iscount stores that had opened inarger cities 5ere co#peting 5ith other discount stores.4ther discount chains reai;ed that Ga="art had a

pro&itabe strategy, so the issue beca#e 5ho 5oud getto each to5n &irst. Ga="art no5 &ound itse& in a preemption game.






E-TR? ETERRE-CE().'

To deter entry, the incumbent firm must convince any

potential competitor that entry will be unprofitable.

ut 5hat i& you can #a$e an irre/ocabe co##it#ent that5i ater your incenti/es once entry occurs>a co##it#entthat 5i gi/e you itte choice but to charge a o5 price i&entry occurs






E-TR? ETERRE-CE().'

+trategic Trade Poicy and Internationa Co#petition

The de/eop#ent and production o& a ne5 ine o& aircra&t aresub<ect to substantia econo#ies o& scaeM it 5oud not pay tode/eop a ne5 aircra&t uness a &ir# e:pected to se #any o& the#.

+uppose it is ony econo#ica &or one &ir# to produce the ne5

aircra&t.

The Commer'ia& Air'raft 6aret






E-TR? ETERRE-CE().'

+trategic Trade Poicy and Internationa Co#petition

The Commer'ia& Air'raft 6aretEuropean go/ern#ents, o& course, 5oud pre&er that Airbus produce thene5 aircra&t. Can they change the outco#e o& this ga#e

+uppose they co##it to subsidi;ing Airbus and #a$e this co##it#entbe&ore oeing has co##itted itse& to produce. I& the Europeango/ern#ents co##it to a subsidy o& 20 to Airbus i& it produces the paneregardless of what *oeing does, the payo&& #atri: 5oud change.






E-TR? ETERRE-CE().'

In the eary (9'0s, uPont and -ationa Dead each accounted &or about a thirdo& B.+. titaniu# dio:ide saesM another se/en &ir#s produced the re#ainder.uPont 5as considering 5hether to e:pand capacity. The industry 5aschanging, and those changes #ight enabe uPont to capture #ore o& the#ar$et and do#inate the industry

Three &actors had to be consideredJ

uture de#and 5as e:pected to gro5 substantiay.

-e5 en/iron#enta reguations 5oud be i#posed.

The prices o& ra5 #aterias used to #a$e titaniu# dio:ide 5ere rising.The ne5 reguations and the higher input prices 5oud ha/e a #a<or e&&ecton production cost and gi/e uPont a cost ad/antage, both because itsproduction technoogy 5as ess sensiti/e to the change in input prices andbecause its pants 5ere in areas that #ade disposa o& corrosi/e 5astes#uch ess di&&icut than &or other producers.






E-TR? ETERRE-CE().'

uPont anticipated that other producers 5oud ha/e to shut do5n part o& theircapacity.

Co#petitors 5oud in e&&ect ha/e to KreenterL the #ar$et by buiding ne5 pants.Coud uPont deter the# &ro# ta$ing this step

uPont considered the &oo5ing strategyJ in/est neary @00 #iion in increasedproduction capacity to try to capture percent o& the #ar$et by (931.

The idea 5as to deter competitors from investing . +cae econo#ies and#o/e#ent do5n the earning cur/e 5oud gi/e uPont a cost ad/antage.

y (9'1, things began to go a5ry.

ecause de#and gre5 by #uch ess than e:pected, there 5as e:cess capacityindustry5ide.

ecause the en/iron#enta reguations 5ere ony 5ea$y en&orced, co#petitorsdid not ha/e to shut do5n capacity as e:pected.

uPont8s strategy ed to antitrust action by the edera Trade Co##ission in

(9'3.






E-TR? ETERRE-CE().'

The disposabe diaper industry in the Bnited +tates hasbeen do#inated by t5o &ir#sJ Procter N *a#be, 5ith anappro:i#atey 10=percent #ar$et share, and Oi#bery=Car$, 5ith another )00 percent.

Ho5 do these &ir#s co#pete And 5hy ha/en8t other &ir#sbeen abe to enter and ta$e a signi&icant share o& this @1=biion=per=year #ar$et

The co#petition occurs #osty in the &or# o& cost1reducing

innovation. As a resut, both &ir#s are &orced to spendhea/iy on research and de/eop#ent in a race to reduce

cost.






ABCTI4-+F().3

●a+'tion maret "ar$et in 5hichproducts are bought and sod

through &or#a bidding processes. Auction or#ats

●Eng&i%h ;or ora&< a+'tion Auction in 5hich aseer acti/ey soicits progressi/ey higher bids &ro#a group o& potentia buyers.

●,+t'h a+'tion Auction in 5hich a seer beginsby o&&ering an ite# at a reati/ey high price, thenreduces it by &i:ed a#ounts unti the ite# is sod.

●%ea&ed9bid a+'tion Auction in 5hich a bids are#ade si#utaneousy in seaed en/eopes, the

5inning bidder being the indi/idua 5ho hassub#itted the highest bid.

● fir%t9pri'e a+'tion Auction in 5hich the saesprice is eua to the highest bid.

●%e'ond9pri'e a+'tion Auction in 5hich the saes

price is eua to the second=highest bid.






ABCTI4-+().3

auation and In&or#ation

●private9va&+e a+'tion Auction in 5hich each bidder$no5s his or her indi/idua /auation o& the ob<ect up&or bid, 5ith /auations di&&ering &ro# bidder to bidder.

●'ommon9va&+e a+'tion Auction in 5hich the ite#has the sa#e /aue to a bidders, but bidders do not

$no5 that /aue precisey and their esti#ates o& it /ary.

Pri/ate=aue Auctions

Ghate/er the auction &or#at, each bidder #ust choose his or her biddingstrategy.

or an open Engish auction, this strategy is a choice o& a price at5hich to stop bidding.

or a utch auction, the strategy is the price at 5hich the indi/iduae:pects to #a$e his or her ony bid.

or a seaed=bid auction, the strategy is the choice o& bid to pace in

a seaed en/eope.

F().3






ABCTI4-+().3

Co##on=aue Auctions

+uppose that you and &our other peope participate in an ora auctionto purchase a arge <ar o& pennies, 5hich 5i go to the 5inning bidderat a price eua to the highest bid.

4nce you ha/e esti#ated the nu#ber o& pennies in the <ar, 5hat isyour opti#a bidding strategy

The =inner8% C+r%e

●)inner8% '+r%e +ituation in 5hich the 5innero& a co##on=/aue auction is 5orse o&& as aconseuence o& o/eresti#ating the /aue o& the

ite# and thereby o/erbidding.

F().3






ABCTI4-+().3

"a:i#i;ing Auction Re/enue

Here are so#e use&u tips &or choosing the best auction &or#at.

1 In a pri/ate=/aue auction, you shoud encourage as #any bidders aspossibe.

2 In a co##on=/aue auction, you shoud 6a7 use an open rather than aseaed=bid auction because, as a genera rue, an Engish 6open7 co##on=

/aue auction 5i generate greater e:pected re/enue than a seaed=bidauctionM and 6b7 re/ea in&or#ation about the true /aue o& the ob<ect beingauctioned.

3 In a pri/ate=/aue auction, set a #ini#u# bid eua to or e/en so#e5hathigher than the /aue to you o& $eeping the good &or &uture sae.

idding and Cousion

uyers can increase their bargaining po5er by reducing the nu#ber o& biddersor the &reuency o& bidding. In so#e cases this can be acco#pished egaythrough the &or#ation o& buying groups, but it #ay aso be acco#pishediegay through cousi/e agree#ents that /ioate the antitrust a5s.

F().3






A&ter +otheby8s and Christie8s auction houses 5ere &ound guity in200( o& &i:ing co##ission prices, a &edera cass=action a5suit &oo5ed.

Ghen &edera courts #anage cass=action suits, they are responsibe &ora5arding attorney8s &ees. In this case, the <udge decided to hod an auction toseect the a5 &ir# that 5oud represent the painti&& cass.

The <udge entertained secret seaed bids &ro# 20 a5 &ir#s. Each &ir# 5as tod too&&er a &ee arrange#ent consisting o& a base and a percentage. A sette#ent ortria a5ard at or beo5 the base 5oud be gi/en entirey to the painti&&s, 5ith thea5 &ir# recei/ing nothing. I& the sette#ent or a5ard 5as higher than the base,the a5 &ir# 5oud recei/e the stated percentage o& the a#ount o/er the base.

The 5inning bidder 5as the a5 &ir# o& oies, +chier, N e:ner, 5hich bid abase o& @01 #iion and a percentage o& 21 percent. +o#e suggested that the&ir# #ight not 5or$ hard in the painti&&s8 interest because the #ini#u# #ight beunachie/abe.

oies setted 5ith de&endants &or @1(2 #iion, earning the attorneys a @2.'1#iion &ee and generating <ust o/er @'1 #iion &or the cass #e#bers.

ABCTI4-+().3F().3




T h e o r y a n d C o m p

e t i t i v e S t r a t e g y

Ho5 has eay co#e to do#inate the Internet auction#ar$et Ghy ha/en8t other Internet auction sites 6such as?ahoo and A#a;on7 succeeded in ta$ing #ar$et share&ro# eay

The ans5er is that Internet auctions are sub<ect to /ery

strong network externalities.

I& you 5anted to auction o&& so#e rare coins or Po$Q#oncards, 5hich auction site 5oud you choose

The one that had the argest nu#ber o& potentia bidders.

Di$e5ise, i& you 5anted to bid &or rare coins or Po$Q#oncards, you 5oud choose the auction site 5ith the argestnu#ber o& seers.

ecause eay 5as the &irst #a<or Internet auction site, itbegan 5ith a arge #ar$et share, and its share gre5

ABCTI4-+().3F().3

Documents

PM7e_ab.az.ch13PindyckRubinfeld_Microeconomics_Ch13