Game Theory - Application to Banking and Finance

1.) Imitate as soon as the other has revealed his approach (ex. sailboat racing)

2.) wait longer until the success or the failure of the approach is known (ex. computer.. )

--> second strategy is more advantageous in business and not in sports, because the competition is usually not "winner takes all".

- the number of players is high

- the deviations are difficult to observe

- the last period of interaction is known

a price war following an entry is not credible

--> backward induction prooves that the punishment is not credible at any period.

- detecting any deviation

- if possible, limiting the gain of cheating

- guarantee the punishment

Scorched earth policy refers to the practice of destroying anything that might be useful to the enemy:

food, shelter, industrial resources,... etc. 

--> such strategy offers some advantages when the enemy is far from home; but it has to be used as a last resort!!

1.) modifying the payoffs of the game 

--> to change payoffs so that it is in your own interest to behave as it has been announced

2.) modifying the actions or outcomes of the game, in order to restrict the possibilities for not honoring one's commitment

3.) using the other players to help oneself to honour our commitment

1.) Building your own reputation

2.) Signing a contract (1+2 --> 1. principle)

3.) Cutting any communication

4.) Burning the bridges behind

5.) Leaving the outcome beyond your control (3,4+5--> 2.principle)

6.) moving by small steps

7.) Working inteam

8.) Giving a mandate to a third party

No, because a firm may be in a competitive position with itself. A new computer, for example, may compete with an old one.