Information Economics and Game Theory for Management

Information Economics and Game Theory for Management

State Research University, Higher School of Economics

Professor:Jonathan Peterson, , ,

Classes:Tuesdays 26 February until 25May 2012. Time 18:10-21:00 Room 215

Note: No classes on 26 March and 7 May.

Office hours:by appointment Office #806

Course Description:Game theory is the science of strategic decision-making in situations where players’ actions are interdependent. It provides a method for identifying optimal strategies and predicting the outcomes of strategic interactions. Information Economics examines situations where players have different information from each. Using lectures, in-class games, and assignments, we develop the basic tools of game theory and information economics as they relate to business situations, and then apply them to real-world situations. Topics covered may include strategic cooperation and punishment between firms, strategic commitments, predatory and limit pricing, entry deterrence, adverse selection and moral hazard. This course requires only basic mathematics, but a familiarity with microeconomics and strategy is helpful.

Course Objectives:

Familiarize students with Game Theory and Information Economics to a level that they can solve simple exercises.
Train students to use the above insights in analyzing business situations and opportunities.
Using the aforementioned topics as an example, illustrate how scientists identify and approach interesting and important topics for research.

Course blog:I have created a website for the course, to which I will regularly post items regarding the course. I encourage you to send me relevant items you run across so that I can post them to the website. The URL is To be invited to the website, send an email to . CC: ,

Course grade components:

1. Class participation and attendance 15%

2. Quiz15%

3. Individual take-home assignments 10%

4. Group final paper and presentation 30%

5. Final exam 30%

Details of the grade components:

Class participation and attendance: Notice that class participation and attendance for lectures and seminars account for 15% of your grade. Preparation questions may be provided for readings. Doing all the readings with these questions in mind and then thinking through how you might answer them is the best way to learn the material and prepare for class. You are encouraged to prepare in groups. I may cold call and expect all students to be familiar with the day’s material.Not actively contributing to classroom learning will hurt your grade.

In lectures, I present the topics and go through some games representative of ones in which you will be expected to solve in homework examples and exams. I will also discuss how these concepts in real world settings. In seminar periods, we conduct classroom games, discuss additional motivating examples, and have student presentations. This class is indented to be a unique mix of traditional game theory and case study discussion. Therefore, attendance and participation is necessary to do well in the class.

Take-home assignments: There will be several take-home assignments due at the beginning of class on dates to be specified. Some may be small group assignments, while others will be individual assignments. By individually, I mean without the help or guidance of others.

Final paper: The final deliverable is a small-group paper on a real-world application of game theory that you will choose with your group. A one-page proposal for this paper is due approximately 2-May. The full paper must be emailed to me 24-May.Instructions for this assignmentwill beprovided later.

Groups: You may form groups with anyone in the class, and group composition may vary by assignment. Groups should have 2-3 people (exceptions may be granted upon priorrequest; expected quality will be proportional to group size). See me if you have trouble forming a group.

Typesetting rules for written work: All assignments must be in English. They must be typeset, double-spaced, 12 point font, Times New Roman font with one-inch margins (so, no more than 23 lines per page). Coversheets do not count towards the page limit. I have found from previous classes that approximately 10 percent of students ignore these rules. Please don’t be one of these students.To be fair to others, violating length rules may lead to a loss of points.

Readings

The readings in this course will be a combination of textbooks, HBS cases and, newspaper articles.

The following textbooks may be helpful:

Thinking Strategically: The Competitive Edge in Business, Politics and Everyday Life,Dixit and Nalebuff, 1993. Recommended for general strategic thinking and includes some discussion of business topics. This is a quick and insightful read.
Game Theory for Applied Economists,Gibbons, 1992. If you want to learn more game theory and know some calculus and probability, this is a good start. The intended audience is an advanced undergraduate economics student.
Strategies and Games Dutta, Prajit, MIT Press, 1999.
Games of Strategy, 2ndEdition, Dixit and Skeath, 2004. An accessible, clear introduction to game theory for a general first course. Most applications are not business related.

The following articles may also be used. This list of what might be used for the class, I will likely change some of them before the start of the term in order to stay current.

Foundations

“Philips Compact Disk Introduction (B)” HBS case, 4 pages)
"American Airlines Value Pricing" HBS case, 24 pages.
Harrington (2006) "How do cartels operate?" in Foundations and Trends in Microeconomics, Vol. 2, No. 1.
The right game: Use game theory to shape strategy, Brandenburger and Nalebuff, Harvard Business Review, July-August 1995, pages 57-71

Prisoner’s dilemma

“Lesser Antilles Lines: The Island of San Huberto,” Darden case, 12
“DeBeers, Russia wrangle over diamonds,” Wall Street Journal, November 28, 1996, 1 page

Entry and exit

"Chapter 9: Entry and Exit," pages 286-309, excerpted from Besanko, Dranove, Shanley, and Schaefer, Economics of Strategy, 2007. These pages discuss facts about entry and exit, and entry-deterring strategies limit pricing and capacity expansion.
"Collusive Predation: Matsushita v. Zenith (1986)," in The Antitrust Revolution: Economics, Competition, and Policy, 3rd edition. A nice look at a classic predatory pricing case. Involves international predation and demonstrates the difficulty in winning legal cases against predation. A link to the article:
"The Ready-to-Eat Breakfast Cereal Industry (A)" HBS case, 17 pages.
"Judo in Action" HBS case, sections on Red Bull and AOL vsFreeserve, 3 pages.
, "Two years of battle between HD DVD and Blu-ray: a retrospective," Engadget Blog, 2/20/08, 8 pages.
Instructions for war of attrition game, which is later in the syllabus.

Asymmetric Information

The Market for "Lemons": Quality Uncertainty and the Market Mechanism, George A. Akerlof, The Quarterly Journal of Economics, Vol. 84, No. 3 (Aug., 1970), pp. 488-500
“Adverse Selection in the Used Car Markets: Evidence from Purchase and Repair Patterns in the Consumer Expenditure Survey.” Peterson, Jonathan and Henry Schneider, Unpublished
“Paying for PR – but only when it works,” Wall Street Journal, December 17, 2007, 2 pages

Additional reading examples

“New ads will stir up coffee wars,” Wall Street Journal, May 4, 2009, 1 page.
“From Seattle, with lattes: And Russian rivals await,” Wall Street Journal, August 31, 2007, 2 pages.
“Frontier: Not about to pack its bags,” Business Week, February 20, 2006, 2 pages.
“Geox takes on the goliaths of sport,” Business Week, April 14, 2008, 1 page
“Rolls Royce’s victory in landing engine job shows industry’s ills,” Wall Street Journal, January 2, 1996, 2 pages.
“Technology titans battle over format of DVD successor,” Wall Street Journal, March 15, 2004, 2 pages.
“When hybrid cars collide,” Wall Street Journal, February 6, 2003, 2 pages