Week 1

Sequential Games II
Backward Induction
 Chocolate Wars
no
Mars product product
placement placement

product no
Hershey status product
quo placement
placement

Mars $ -0.2mn $ -0.5mn $0

Hershey $ -0.1mn $ 0.2 mn $0
 Backward Induction
 Simplification of a sequential game
 Eliminate actions at the final node and work one’s way forward
 Choose those actions that would not maximize an
individual’s profit at that point
 A rational player always tries
to maximize their own profits
 You can rely on a rational rival
never choosing these actions
 Chocolate Wars
no
Mars product product
placement placement

product no
Hershey status product
quo placement
placement

Mars $ -0.2mn $ -0.5mn $0

Hershey $ -0.1mn $ 0.2 mn $0
 Price Setting

Firm A high low

Firm B
high low high low

Firm A $ 8mn $ 0mn $ 10mn $ 5mn

Firm B $ 8mn $ 10mn $ 0mn $ 5mn
Competitive Strategy
Tobias Kretschmer
Professor of Management, LMU Munich

© 2013 LMU Munich