ECON5323 Organisational Economics
Introduction to Incentives
, The sequential-move game
• So far: simultaneous move games in which players choose their strategies
without knowing what the others have chosen
• So far: complete information where players know each other’s available
strategies and payoffs
• In games with sequential moves and complete information, a player
moves first, and other players see what he has done before choosing
their strategies
• What would we expect to happen in sequential move games? What
solution concept should we use?
, Example of sequential-move game: Entry Deterrence
• In the first stage, a newcomer firm can enter and challenge the
monopolist’s market share, or stay out
• If the entrant doesn’t enter, he gets 0 and the monopolist gets the whole
market, with a payoff of 4
• If the entrant enters, in the second stage the monopolist can fight or not
fight
• Fighting is costly for both: both get −1
• If the monopolist doesn’t fight, the two firms share the market and both get 2
, Example of sequential-move game: Entry Deterrence
• Players: entrant and monopolist 𝐼 = {𝐸, 𝑀}
• Strategies: 𝑆! = {Enter, Stay out} 𝑆 " = {Fight, Not fight}
• Payoffs are presented in the matrix on the next slide
Introduction to Incentives
, The sequential-move game
• So far: simultaneous move games in which players choose their strategies
without knowing what the others have chosen
• So far: complete information where players know each other’s available
strategies and payoffs
• In games with sequential moves and complete information, a player
moves first, and other players see what he has done before choosing
their strategies
• What would we expect to happen in sequential move games? What
solution concept should we use?
, Example of sequential-move game: Entry Deterrence
• In the first stage, a newcomer firm can enter and challenge the
monopolist’s market share, or stay out
• If the entrant doesn’t enter, he gets 0 and the monopolist gets the whole
market, with a payoff of 4
• If the entrant enters, in the second stage the monopolist can fight or not
fight
• Fighting is costly for both: both get −1
• If the monopolist doesn’t fight, the two firms share the market and both get 2
, Example of sequential-move game: Entry Deterrence
• Players: entrant and monopolist 𝐼 = {𝐸, 𝑀}
• Strategies: 𝑆! = {Enter, Stay out} 𝑆 " = {Fight, Not fight}
• Payoffs are presented in the matrix on the next slide
