Week 1

Simultaneous Games II
Eliminating Dominated
Strategies
 Pizza War
 Piccola Osteria and Rosso Pizza sell pizza
 They can charge
• High price: €12
• Medium price: €10
• Low price: €5
 Around school there are 1,000 students
• 300 only buy at Piccola Osteria
• 300 only buy at Rosso Pizza
• 400 buy the cheaper pizza or
choose randomly if same prices
 Game Setting (I/II)
 Players
• Piccola Osteria
• Rosso Pizza
 Actions
• High prices
• Medium prices
• Low prices
 Rules
• Both decide on prices simultaneously
 Game Setting (II/II)
 Example
• Piccola Osteria: medium price
• Rosso Pizza: high price
 Payoffs
• Piccola Osteria sells to its 300 loyal students
plus the 400 price-sensitive students
at €10 per pizza

• Rosso Pizza sells to its 300 loyal students

at €12 per pizza
 Matrix Form
Piccola Osteria
High Medium Low
Pizza Rosso

H 6.0 / 6.0 3.6 / 7.0 3.6 / 3.5

M / 5.0 / 5.0 3.0 / 3.5 in 1000 Euros

L 3.5 / 3.6 3.5 / 3.0 2.5 / 2.5

 Dominant Strategy
 A strategy that always does better than
any other strategy
 Hence, should always be chosen by
a rational player

 You can rely on a rational rival

always playing a dominant strategy
 Dominated Strategy
 A strategy that never does better
than another one
 Hence, a rational player would never
opt for this strategy

 You can rely on a rational rival

never playing a dominated strategy
 Solving the Pizza War
Piccola Osteria
High Medium Low
Pizza Rosso

H 6.0 / 6.0 3.6 / 7.0 3.6 / 3.5

M 7.0 / 3.6 5.0 / 5.0 3.0 / 3.5 in 1000 Euros

L 3.5 / 3.6 3.5 / 3.0 2.5 / 2.5

 Elimination Process
 Eliminate dominated strategies one by one
 Continue until a solution to the game
can be found / you cannot eliminate more
Competitive Strategy
Tobias Kretschmer
Professor of Management, LMU Munich

© 2013 LMU Munich