Game Theory

Game 3

Your Value to a Game

Your Value to a Game

You: Director of a commercial-free music video channel Cable companies pay to carry you You make a take-it-or-leave it offer

Cable Companies: Each channel has $100K in value Cable companies have varying capacities (k) Select the k best (lowest) offers

Market 1: 50, Market 2: 30, Market 3: 20

2

Your Value to a Game

Your added value =

the size of the pie when

you are in the game

minus

the size of the pie when you are not

3

Unlimited Capacity (k=50)

Unlimited Capacity

What is your value to the game? What is the total value of the game? How much should you be paid to play?

4

Class Results

Most requested 100 Or 99, or 99.9, or 99.999999

But…some LOVE the cable company A few requested less than 50 One requested 10

5

Slightly Limited Capacity (k=30)

Perception of Bargaining Power

What is your value to the game? What is your perceived value? What is the total value of the game? How much should you be paid to play?

6

Limited Capacity (k=20)

Perception of Bargaining Power

What is your value to the game? What is the total value of the game? How much should you be paid to play?

7

k = 30

51

65

49

51

x 30

= 1530

(+236%)

k = 50

Average offer: 88

Accept offers below: 100

Average accepted offer: 88

My profit per channel: 12

My profit: x 38

= 456

k = 20

31

30

18

82

x 20

= 1640

(+260%)

Payoff Summary

8

Intuition

By reducing capacity I lower your added value I gain bargaining power I get a better price per channel I gain higher profits overall

But: The value of the game is smaller

9

Best Score

maximum profit = 100 + 65 + 30 = 195

Nicholas 100+ 55 + 30 = 185

Cathleen 100+ 64 + 18 = 182

10

Others

Swinging for the fences Zack 100 + 80 + 65 = 100

Playing it safe Rachel 100 + 20 + 5 = 125

Playing it very safe Hamit 18 + 16 + 10 = 44

11