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Asymmetric Information in Game Theory

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1.
a. You and a competing firm are the only sellers of a new product. You are engaged in an intense battle for initial market share. You both realize that the one who captures most of the market share will be the one who spends the most on advertising and promotion. You are the marketing manager and you have up to $1 million for advertising and promotion for all your products. You have to decide how much of your budget you should allocate to the marketing of the new product. Construct a payoff matrix similar to the one shown in Figure 11.3. Notice in Figure 11.3 that the price is the variable designated as being "high" or "low." What variable would you use in this example? The numbers in Figure 11.3 represent potential revenue. What might they represent in this example?

b. What challenges do you think there are in using this type of analysis in an actual business situation?

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a)
>Construct a payoff matrix similar to the one shown in Figure 11.3.
See the attached file.

>Notice in Figure 11.3 that the price is the variable designated as being "high" or "low." What variable would you use in this example?
The portion of the $1 million advertising budget that ...

Solution Summary

This solution uses game theory to analyze the marketing decisions faced by two competitors, and explains the challenge that asymmetric information could pose to the game's long-run equilibrium.

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One of the recent Nobel Prize winners for economics was Oliver E. Williamson, for his work on economic governance and limitations of firms, including the concept of asymmetric information. The text below is to a somewhat humorous, yet applicable, article that relates this concept to monogamy and offers ways to overcome it. Discuss the issue of asymmetric information as posed in the article).

Some people sincerely like monogamy; other people sincerely don't. Under the circumstances, it seems wise for everyone to just reveal their proclivities and pair up with people who share their expectations. Unfortunately, I don't see this happening. There is a fundamental flaw with monogamy, but it's not human nature. It's asymmetric information.

My key assumption: Most people - even most commitmentphobes - prefer a person who will be true to them. When you announce your religion, you make yourself less desirable to people who reject your religion, but more desirable to people who share it. When you announce your rejection of monogamy, in contrast, you make yourself less desirable even to people who share your rejection.

In a world of symmetric information, this wouldn't matter. People would know as much about your proclivities as you do, so there'd be no reason to pretend to be something you're not. But in the real world, no one knows your own preferences better than you do. The result: People pretend to be more monogamous than they really are.
This leads to two kinds of dissatisfaction. First, people who are monogamous feel abused and betrayed. Second, people who are not monogamous feel like they "can't be themselves. Taken together, I think these two complaints explain most of the bitterness people feel about the institution of marriage.

Based on the Game Theory you studied from the text, and your own research, what solutions can you suggest?

Can you help me with this assignment?

One of the recent Nobel Prize winners for economics was Oliver E. Williamson, for his work on economic governance and limitations of firms, including the concept of asymmetric information. The text below is to a somewhat humorous, yet applicable, article that relates this concept to monogamy and offers ways to overcome it. Discuss the issue of asymmetric information as posed in the article).

Some people sincerely like monogamy; other people sincerely don't. Under the circumstances, it seems wise for everyone to just reveal their proclivities and pair up with people who share their expectations. Unfortunately, I don't see this happening. There is a fundamental flaw with monogamy, but it's not human nature. It's asymmetric information.

My key assumption: Most people - even most commitmentphobes - prefer a person who will be true to them. When you announce your religion, you make yourself less desirable to people who reject your religion, but more desirable to people who share it. When you announce your rejection of monogamy, in contrast, you make yourself less desirable even to people who share your rejection.

In a world of symmetric information, this wouldn't matter. People would know as much about your proclivities as you do, so there'd be no reason to pretend to be something you're not. But in the real world, no one knows your own preferences better than you do. The result: People pretend to be more monogamous than they really are.
This leads to two kinds of dissatisfaction. First, people who are monogamous feel abused and betrayed. Second, people who are not monogamous feel like they "can't be themselves. Taken together, I think these two complaints explain most of the bitterness people feel about the institution of marriage.

Based on the Game Theory you studied from the text, and your own research, what solutions can you suggest?

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