Analyzing Strategic Behavior in Business and Economics

Thomas J. Webster is a professor of economics in the Department of Finance and Economics of Pace University’s Lubin School of Business in New York City. Before joining the faculty at Pace University, Dr. Webster held positions as an international economist with the Central Intelligence Agency, the U.S. Department of Defense, Manufacturers Hanover Trust Company, and Continental Illinois National Bank and Trust Company. Dr. Webster has served as graduate and undergraduate finance program chair, and as faculty advisor to Beta Gamma Sigma, the international honor society for collegiate schools of business. He is the recipient of the Lubin School of Business Scholarly Research Award for Basic Scholarship, the Lubin School of Business Outstanding Faculty Service Award, the Pace University Award for Distinguished Service, and the Beta Gamma Sigma Commitment to Excellence Award. Dr. Webster received his BA from the School of International Service of American University, and his MA, MPhil, and PhD from the City University of New York.

• PREFACE1INTRODUCTION TO GAME THEORYIntroductionStrategic behaviorShort history of game theoryLexicon of game theoryRational versus actual behaviorPractice ExercisesPART I: STATIC GAMES WITH COMPLETE INFORMATION2COALITION GAMESIntroductionPrisoner’s dilemmaThe extensive formThe normal formNash equilibriumShortcut for finding-pure strategy Nash equilibriaDeterminants of business collusionNumber of firms with similar interestsFirm size relative to the industryVisibilityPractice Exercises3STRATEGIC MOVES AND DETERRING DEFECTIONIntroductionStrategic movesDeterring defectionContractsReputationCutting off communicationsPreventing retreatBrinksmanshipIncrementalismTeamworkAgentsPractice exercises4COMPETITION GAMESIntroductionStrictly-dominant strategiesWeakly-dominant strategiesIterated elimination of dominated strategiesThree-player gamesNon-dominant strategiesMaximin (secure) strategyPractice exercises5COORD

Business decisions are rarely made in a competitive vacuum. A manager’s ability to maximize a firm’s value on behalf of shareholders may be hamstrung by an inability to raise finance capital, disruption in the flow of critical raw materials, shortages of skilled labor, capacity constraints, labor unrest, insufficient warehouse space, more. Managers who are able to put themselves in to the shoes of rivals are more likely to successfully achieve the firm’s objectives than those who do not. This volume is an introduction to game theory, the systematic analysis of decision making in interactive settings. Game theory identifies a decision maker’s best response to situations involving move and counter move. Thomas J. Webster is professor of economics in the Department of Finance and Economics of Pace University’s Lubin School of Business in NYC.