Game Theory - Coordination Game - Arrow Technique
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Using the example of coordination problems in the market for HDTV, show the game in strategic form using hypothetical payoffs of your choice. Use the arrow technique to identify the equilibria.
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Solution Summary
In this post the a game theoretical coordination game is build using the hypothetical payoffs and then the equilibrium is identified using the arrow technique. The post highlights the concepts of game theory and illustrates how companies take strategic decisions and evaluate their competitor's actions. A good exercise to understand concepts of game theory.
Solution Preview
See the attached file for complete solution. The text here may not be copied exactly as some of the symbols / tables may not print. Thanks
The strategic game to be designed for something similar to HDTV case will be like this:
1. There are two players - One player is manufacturer and other player is television network
2. Assume that there are only these two players in the market i.e. only one manufacturer and one television network.
3. There are two options available for manufacturer - either to invest heavily and mass-produce the product or not to invest and wait and watch that the product is accepted in the market.
4. Assume that under first option manufacturer require investment of $10 million on manufacturing, marketing and distribution of product. Reduce the cost of set to $2000 through mass production and cost reductions accruing from riding on learning curve. The ...
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