Day 22 in MIT Sloan Fellows Class 2023, Introduction to marketing and strategy -6 + Applied Economics
Game Theory - Dynamic game-
http://sisdin.unipv.it/lab/personale/pers_hp/ferrari/EECI_DEDICO/6b-DMPC_DeDiCo.pdf
In E-con class, we learned Dynamic game theory, which allows players sequential decisions. In this lecture, I found a beautiful link between E-con and marketing strategy.
Game with horizontal competitors
Alcoa was a huge aluminum company and controlled 45% of aluminum production in the US. This game describes how Alcoa raises the entry barrier by overinvesting the capacity.
Let's resolve this game. Dynamic games are always backward thinking. On the top two options, Alcoa always chooses (5,5) comparing their outcome 3 and 5. Then, the Entrant should choose "In" because they compare 0 and 5. (Compare with a middle tree.)
The other side, Alcoa chooses ( -1, 1) comparing 0 and 1. Then Entrant chooses "out".
The final option for Alcoa to determine whether invest or not is a comparison between (0.15) and (5,5). Of course, Alcoa chooses (0,15) to maximize its profit.
This case clearly violates antitrust because it pushed out potential competitors and minimize horizontal competition.
Game with vertical competitors( players in another value chain)
Look at a different example.
This example beautifully explains how to realize vertical collaboration and enhance bargaining power. Intel would not choose Monopoly, thus computer manufacturers can invest in Intel licence and it realizes collaboration between different vertical value chains. But, the large amount of profit is extracted by Intel because it has huge bargaining power.
Professor Duncan told me Apple and AT&T case for an bad example of relationship with different value chain players.
In 2008, Apple and AT&T had five years exclusive deal. This is a great example of the importance of backforward thinking.
This five years deal would benefit only for AT&T. Why?
iPhone had huge demand and everyone wanted to buy iPhone. There were no significant competitors in smartphone field( Nokia was a dominant position in cell phones and "smart phone" was only Black Berry)
So, Apple should distribute iPhone to all the networks including T-mobile and Verizon. However, Jobs may have been very conservative or tried to deliver premium image, he decided an exclusive deal with AT&T. What happened?
After the deal, Verizon(another player in another value chain) invested in Android. This movement created the biggest competitor to Apple.
This case also beautifully illustrates Apple should have tried backward thinking.
