APPLICATIONS OF GAME TREES

Adam Brandenburger

filename: applications-of-game-trees-03-02-11
 Softsoap

1964: Entrepreneur Robert Taylor founds personal-care products

company Minnetonka Corporation
1977: Develops the Incredible Soap Machine—liquid soap in a pump
dispenser
1980: Launches the product into the mass market as Softsoap

How will the major players in the bar soap industry—Armour-Dial,

P&G, Lever Bros., Colgate-Palmolive—react? If they copy Softsoap,
can it survive?

Other Minnetonka innovations:

Check-Up pump-dispensed toothpaste
http://www.nytimes.com/1984/10/11/business/toothpaste-pump-battle-near.html?&pagewanted=all

Calvin Klein Obsession and Eternity fragrance campaigns

http://www.vanityfair.com/culture/features/2008/04/calvin_slideshow200804?slide=4#slide=4

2 Reference: “Minnetonka Corporation: From Softsoap to Eternity,” HBS Case 795-163 and Teaching Note
 Softsoap cont’d

The major players adopted a wait-and-see approach—why?

3
 Softsoap cont’d

Eventually, the major players entered with different (inferior) brand

names—to delink the liquid-soap game from the bar-soap game

As a result, Softsoap enjoyed a sufficient window of opportunity

without competition, to survive once the competition arrived

Softsoap trademark is owned by Minnetonka Co.

4
 Softsoap cont’d: A Game Tree
– c, m
Product
E is the entrant succeeds
I is the incumbent
Copy Fails
I – c, – d

m – c, 0
Introduce Don’t Product
succeeds
E Fails
– c, 0
Don’t

0, 0

When should E enter (under the expected payoff criterion)?

Based on “Judo Strategy: Fear of Failure,” by Adam Brandenburger and Ken Corts, teaching material, 12/24/07; “Innovation and
Imitation,” by Vijay Krishna, Harvard Business School Case, 187-160; and “Innovation and Imitation in a Duopoly,” by J.P. Benoit,
5 Review of Economic Studies, 52, 1985, 99-106; this analysis draws on work by Stern MBAs Laura Brown, Nancy Li, Corina Scott,
and Sean Wilson
 The Puzzle

Newcomers to a business face many

disadvantages
They lack:
 Proven products
 Brands
 Loyal customers
 Manufacturing experience
 Relationships with suppliers,
distributors, regulators, etc.
Picture: Wikipedia

Surely the incumbents hold all the cards?

6
 Judo Strategy

The challenger finds a way to play off the links between the business it
is targeting and the incumbent’s existing business

It does something that the incumbent can’t match without hurting its
existing business

Kyuzo Mifune (l) and Jigoro Kano (r)

Picture: Wikipedia

7 Reference: “Judo Economics: Capacity Limitation and Coupon Competition,” by J. Gelman and S. Salop, Bell Journal of
Economics, 14, 1983, 315-325
 The Role of Metaphor

Metaphors play an important role in business. They simplify a

complex world, help organize facts and intuitions, and allow
you to express ideas in a lively, thought-provoking way.
Moreover, metaphors can be great motivational tools because
they are usually easy to understand and hard to forget.
--Judo Strategy, by David Yoffie and Mary Kwak, Harvard Business
School Press, 2001, p.ix

8
 “The Fox Borrows the Tiger’s Terror” *

One day a tiger was hunting around in a forest. An unlucky fox was met and
caught by the tiger. For the fox, the inescapable fate was very clear—death.
Despite the danger, the fox thought hard to find a way out. Promptly, the fox
declared to the tiger, “How dare you kill me!” On hearing the words the tiger was
surprised and asked for the reason. The fox raised his voice a bit higher and
declared arrogantly: “To tell you the truth, it’s I who was accredited by God to the
forest as the king of all the animals! If you kill me, that will be against the God’s
will, you know?” Seeing that the tiger became suspicions, the fox added: “Let’s
have a test. Let’s go through the forest. Follow me and you will see how the
animals are frightened of me.” The tiger agreed. So the fox walked ahead of the
tiger proudly through the forest. As you can imagine, the animals, seeing the
tiger behind, were all terribly frightened and ran away. Then the fox said proudly:
“There is no doubt that what I said is true, isn’t it?” The tiger had nothing to say
but to acknowledge the result. So the tiger nodded and said: “You are right. You
are the king.”

9
* A Chinese folk tale—this wording is from http://chineseculture.about.com/library/extra/story/blyrh10311999.htm
 Judo Strategy: Pepsi vs. Coke

What was the guiding principle behind Coke’s early moves—in the early to
mid-twentieth century—to develop its business?

“In arm’s reach of desire”

--Robert Woodruff, CEO, 1923-55

(He can charge more if substitutes aren’t

immediately available…)

References: “Cola Wars Continue: Coke and Pepsi in the

Twenty-First Century,” HBS Case 702-442; www2.coca-
10 cola.com heritage timeline; this and the next three slides
draw heavily on a conversation with David Collis Picture: Wikimedia Commons
 Pepsi vs. Coke: The First Mover

●
Franchised bottling operations (after initially failing to see the potential)
1905-1918 ●
Expanded to Cuba, Puerto Rico, France, U.S. territories

●
Reached 1,000 bottlers
1920-1928 ●
Went with the U.S. team to the Amsterdam Olympics

●
Put logo on racing dog sleds in Canada and walls of bull-fighting arenas in Spain
1930’s ●
Developed six-pack and open-top cooler

1941-1945 ●
“Followed the flag” with U.S. troops around the world

●
Doubled number of overseas bottlers from mid-1940s to
1940-1960 1960
11 Reference: www2.coca-cola.com heritage timeline
 Pepsi vs. Coke: Enter Pepsi

What strategy did Pepsi use in its early days against Coke?

Judo!
1934: Priced its 12-ounce bottle the same as Coke charged for its 6.5-ounce
bottle (called the “kitchen cola”)
1940: Created first nationally broadcast advertising jingle (“Pepsi-Cola hits the
spot/Twelve full ounces that’s a lot/Twice as much for a nickel, too/Pepsi-Cola is
the drink for you”)
1950s: Tracked the growth of supermarkets (introduced 26-ounce bottles) and
suburbia—Coke was slower, and faced channel conflict (?)
1958: Targeted young, fashionable consumers with the “Be sociable, have a
Pepsi” theme (and replaced its straight-sided bottle with the “swirl” bottle)—
Coke couldn’t copy without risking its ‘heartland’ image
1962: Launched its “Pepsi Generation” ad campaign to post-war baby boomers

http://www.youtube.com/watch?v=QWQkf0w5JR4

12 Reference: www.pepsi.com/ads_and_history/legacy
 Pepsi vs. Coke: Coke’s Reaction

How did Coke react?

It didn’t!
Because of the judo effect
And because …
Coke didn’t fully recognize Pepsi as a
competitor until the Pepsi Challenge
(1974)
In the 1960s, it took its eye off the U.S.
market and focused internationally
Pepsi grew from 10% share in 1950 to
20% in 1970
Picture: Wikimedia Commons

13 Reference: www.pepsi.com/ads_and_history/legacy
 Judo Strategy: The UK Petrol Price War *

In the early 1990s, UK supermarkets—Tesco, Sainsbury, Safeway,

Asda—entered the UK petrol market, obtaining a 20 percent share by
1995

The strategy was simple—lower prices than those offered by the

major oil companies Shell, Esso, BP
i. Since competition among gas
stations is local, the supermarkets
are targeting only a part of the
market
ii. A price cut is expensive because
Cede share the majors have large customer
Incumbents’ bases
decision tree
Cut price

i. The supermarkets won’t

keep to a small share

* From: “Judo in Action,” by Ken Corts and Debbie Freier, teaching material, 05/29/02; which is based on “Esso Price-
14
Watch,” by Amee Chande and Eleanor Hardwick, course paper, Harvard Business School, Fall 2001
 The UK Petrol Price War cont’d

Is there a third option for the oil companies?

Picture: Wikimedia Commons

15 “Petrol retailers posed to ignite price war,” by Nigel Cope, The Independent, 09/18/95
 Yuan Dynasty China (1279-1368 A.D.)

During the final days of the Yuan dynasty, rebellion had broken out throughout
the empire. Initially, there were several contenders vying to be the first to found
a new dynasty on the imminent fall of the house of Yuan, but the field was
narrowed to two: Chu Yuanchang and Chen Yifu. The two armies met at Poyang
Lake where a naval engagement was to take place. General Chen had the
advantage of both troops and ships. His ships were large and sturdy and he had
them lined up side by side across the entire expanse of the lake. He furthermore
had the ships joined together with iron chains so as to create an impenetrable
barrier. General Chu sent his ships to attack but they were defeated, having
failed to break through the cordon. Fortunately for Chu, the next day a violent
northwest gale began to blow. Since Chen’s flotilla was situated downwind, Chu
took advantage of the situation to launch fireboats against the barrier. Soon
Chen’s troops were in a frenzy to save their ships from both the rising storm and
the fire that was fanned into a blazing fierceness by the wind. Taking advantage
of the panic and confusion that ensued, Chu launched his own fleet into the
attack and they completely defeated Chen’s forces.

16 From: The Thirty-Six Strategies of Ancient China, Stefan H. Verstappen, China Books, 1999, p.57
 And Now … Turning One’s Weakness into a Strength

“In the Arab case the algebraic factor would take first account of the area
we wished to conquer, and I began idly to calculate how many square
miles … perhaps a hundred and forty thousand … and how would the
Turks defend all that … no doubt by a trench line across the bottom, if we
were an army attacking with banners displayed … but suppose we were
an influence (as we might be), an idea, a thing invulnerable, intangible,
without front or back, drifting about like gas? Armies were like plants,
immobile as a whole, firm rooted, nourished through long stems to the
head. We might be a vapor, blowing where we listed. Our kingdoms lay
in each man’s mind, and as we wanted nothing material to live on, so
perhaps we offered nothing material to the killing” (T.E. Lawrence aka
“Lawrence of Arabia”)
--Lawrence of Arabia, by B.H. Liddell Hart, Da Capo, 1989, p.134 (republication of
the 1935 Colonel Lawrence: The Man Behind the Legend)

17
 Totaalvoetbal

Leder nadeel heb z’n voordeel

(Every disadvantage has its advantage)

--Johan Cruyff

http://www.youtube.com/watch?gl=NL&hl=nl&v=U1k7DGqRF5g

18
 Moving First or Second: Lyndon Johnson’s Path to
Power

In 1937, future U.S. president Lyndon Johnson, then an aspiring young politician,
was looking for the chance to gain elective office. Here is how he got his break: *

Lyndon Johnson was in Houston on February 23 [1937] … when he suddenly saw,

on a park bench, a copy of the Houston Post with the banner headline:
CONGRESSMAN JAMES P. BUCHANAN OF BRENHAM DIES. He knew at once, he
was to recall, that “this was my chance….”
 A strategy, money, an organization—these would give this unknown candidate
[Johnson] a slim chance of victory against every opponent but one. Against that
one opponent, nothing could give him a chance. Nothing could offset the
sentimental appeal of a vote for Old Buck’s [Buchanan’s] widow.... And it began to
look as if she was going to run…. So Lyndon Johnson went to see … the man who
was the smartest politician he had ever known…. [He] pulled up in front of the
little white house with the “gingerbread” scrollwork and wisteria, and went into the
shabby front parlor, and asked his father’s advice. Sam Johnson [Lyndon’s
father] didn’t even have to think before giving it. Recalls Lyndon’s brother:
“Lyndon started saying he was thinking of waiting to see what she [Mrs.
Buchanan] does, and Daddy says, “Goddammit, Lyndon, you never learn anything
about politics.” Lyndon says, “What do you mean?”

19 * As told in The Years of Lyndon Johnson: The Path to Power, by Robert Caro, Vintage, 1990, pp.389-399
 Path to Power cont’d

J Run

Run Don’t
B
Don’t Run

J Don’t

B Run

Run Don’t
J Picture: Wikimedia Commons
Don’t Run

B Don’t

20
 Path to Power cont’d

Lyndon Johnson was very dejected as he sat, on the day the [San Antonio]
Express poll appeared, in his parents’ home in Johnson City after hours of
campaigning…. The leaders were almost all against him, he said; he had several
large rallies scheduled, and he had not been able to persuade a single prominent
individual to introduce him.

So, [his cousin] Ava recalls … “his Daddy said, ‘If you can’t use that route, why
don’t you go the other route?’ ”

“What other route?” Lyndon asked—and his Daddy mapped it out for him.

Picture: Wikimedia Commons

21 Reference: Caro, op.cit., pp.428-429

 Path to Power cont’d

There was a tactic, Sam Johnson said, that could make the leaders’ opposition
work for him, instead of against him. The same tactic, Sam said, could make the
adverse newspaper polls work for him, instead of against him. It could even make
the youth issue work for him. If the leaders were against him, he told his son,
stop trying to conceal that fact; emphasize it—in a dramatic fashion. If he was
behind in the race, emphasize that—in a dramatic fashion. If he was younger than
the other candidates, emphasize that.
Lyndon asked his father what he meant, and his father told him.
If no leader would introduce Lyndon, Sam said, he should stop searching for
mediocre adults as substitutes, but instead should be introduced by a young
child, an outstanding young child. And the child should introduce him not as an
adult would introduce him, but with a poem, a very special poem….
That [next] night, at a rally in Henly, in Hays County, Lyndon Johnson told the
audience, “They say I’m a young candidate. Well, I’ve got a young campaign
manager, too,” and he called [his cousin’s son] Corky to the podium, and Corky,
smacking down his hand, recited a stanza of Edgar A. Guest’s “It Couldn’t Be
Done.” … The audience applauded the eager young boy, and before the applause
had died down, Lyndon Johnson took off his coat, and … started in to attack the
“thousands” … who said that just because he was behind, he couldn’t win.
22
Reference: Caro, op.cit.
 The First To Go Last

0 0
Bob
 L
R
U 0 3
Ann  D 3 0 0 0
Bob Ann
 L
R 
U
D
-1 -1 L 3 0
Bob
 R
Ann 0 3
U  U
D -1 -1
Ann  0 0
Ann
The first player to D  U
D
L 3 0
move last can be Bob
said to be the real  R
Ann 0 3

23
first mover!
 U
D
-1 -1
 Example: Cold-War Nuclear Policy

A player may be able to increase his payoff by deliberately discarding

some of his available strategies

(This cannot happen in a decision tree, where a player is playing a “game

against Nature”)

-2 -2
USA Retaliate

Don’t
1 -1
Attack

USSR 
Don’t

Flags: Wikimedia Commons

0 0
www.wired.com/politics/security/magazine/17-10/mf_deadhand
24 Picture: U.S. Military
 Truman

The McCarthys, Wherrys, Tafts, and Wileys had won their suit in the court of public
opinion. Democrats like Kennedy and Lyndon Johnson knew it; to the end of their
lives they would believe that the relinquishment of another … [Asian] state to the
Communists would be political suicide. And Harry Truman had grasped it by April
25, 1950, when, running scared from Republican critics, eager to prove that Alger
Hiss was not a typical Democrat, he instructed the National Security Council to
approve the policy paper that became known as NSC-68. Among other things, this
historic document specified that henceforth up to 20 percent of America’s gross
national product would be devoted to the military establishment and that the
United States would resist any Red threat to non-Red nations anywhere.

After the President initialed it “approved,” NSC-68 was classified; even [Secretary
of State] Dean Acheson, writing his memoirs nineteen years later, could not quote
it. Actually it should never have been kept secret. Had it been published the day it
was adopted, the Korean War would almost certainly have been avoided. Unaware
of it, Stalin and Kim Il Sung assumed that South Korea was ripe for the plucking.

--American Caesar: Douglas MacArthur 1880-1964, by William Manchester, Little,

Brown, 1978; Back Bay, 2008, p.542

25
 Eisenhower

By the beginning of Eisenhower’s second term in 1957, this consensus [to find
ways to fight a limited nuclear war] extended from Secretary of State Dulles
through most of the Joint Chiefs of Staff and into the emerging strategic
studies community, where the young Henry Kissinger made the case for what
would come to be called “flexible response” in an influential book, Nuclear
Weapons and Foreign Policy….

It was all the more startling, then, that Eisenhower so emphatically rejected this
concept of limited nuclear war…. If war came in any form, the United States
would fight it with every weapon in its arsenal…. It was as if Eisenhower was
in denial: that a kind of nuclear autism had set in, in which he refused to listen
to the advice he got from the best minds available.

In retrospect, though, it appears that Eisenhower’s may have been the best
mind available, for he understood better than his advisers what war is really
like…. Eisenhower—the ultimate Clausewitzian—insisted on planning only for
total war. His purpose was to make sure no war at all would take place.

--The Cold War: A New History, by John Lewis Gaddis, Penguin 2005, pp.67-68

26
 Nixon

[T]he Soviet Union and the United States also signed, in 1972, an Anti-Ballistic
Missile Treaty that banned defenses against long-range missiles. This was the
first formal acknowledgment, by both sides, of Churchill’s—and Eisenhower’s
—idea that the vulnerability that came with the prospect of instant annihilation
could become the basis for a stable, long-term, Soviet-American relationship….

--The Cold War: A New History, by John Lewis Gaddis, Penguin 2005, p.81

27
 Reagan

Reagan’s most significant deed came on March 23, 1983, when he surprised the
Kremlin, most American arms control experts, and many of his own advisers by
repudiating the concept of Mutual Assured Destruction…. [H]e asked, in a
nationally televised speech: “What if … we could intercept and destroy strategic
ballistic missiles before they reached our own soil or that of our allies?” It was
an “emperor’s new clothes” question, which no one else in a position of
responsibility in Washington over the past two decades had dared to ask.

The reason was that stability in Soviet-American relations had come to be prized
above all else. To attempt to build defenses against offensive weapons, the
argument ran, could upset the delicate equilibrium upon which deterrence was
supposed to depend. That made sense if one thought in static terms—if one
thought that the nuclear balance defined the Cold War and would continue to do
so indefinitely. Reagan, however, thought in evolutionary terms. He saw that the
Soviet Union had lost its ideological appeal, that it was losing whatever economic
strength it once had, and that its survival as a superpower could no longer be
taken for granted. That made stability, in his view, an outmoded, even immoral,
priority.

--The Cold War: A New History, by John Lewis Gaddis, Penguin 2005, p.81
28
 Example: China-Taiwan*

March 2005:
China passes an anti-secession bill which places the decision to use force, if Taiwan
declares independence, in the hands of the State Council and the Central Military
Commission

React
China

Declare Independence

Don’t
Taiwan 
Don’t
Flags: Wikimedia Commons

* This draws on: “China-Taiwan Cross-Straits,” course paper by Yi-Ching Chu, Spencer Leung, Thitipat Nananukool, and
29
Wanlada Russmetes, Stern School of Business, Spring 2005
 China-Taiwan 1996

How would the U.S. react?

In 1996, when China test fired missiles ahead of Taiwanese elections, the U.S.
sent warships to the China-Taiwan straits

React
US

React

China Don’t
Declare Independence

Don’t
Taiwan 
Don’t
Flags: Wikimedia Commons

30
 China-Taiwan 2005

July 2005:
“If Americans draw their missiles and position-guided ammunition onto the target
zone on China’s territory, I think we will have to respond with nuclear weapons, he
[Zhu Chenghu, a major general in the People’s Liberation Army] told an official
briefing for international journalists”*

Next move?

Go
China
React  Nuclear
US

React
 Don’t

China Don’t
Declare Independence

Don’t
Taiwan 
Don’t
Flags: Wikimedia Commons

31 * From: “Report: China sends nuke warning to U.S. over Taiwan,” cnn.com, 07/14/05
 China-Taiwan 2007

As China converts its growing economic power into military muscle, a lack of
transparency and a habit of secrecy pose formidable challenges in assessing
the country’s long-term ambitions, according to defense experts.
For foreign governments and analysts monitoring the Chinese military, one of
the biggest mysteries is who is actually in charge.
Nominally, President Hu Jintao, who is also chairman of the Central Military
Commission, the top military command body, is head of the armed forces. But
there is considerable doubt among experts about the extent of the authority that
he and his fellow civilian leaders exert over the 2.3 million-strong People’s
Liberation Army….
Doubts about the chain of command in China were heightened in the aftermath
of the PLA’s successful test of an antisatellite missile on Jan. 11, when most
analysts concluded that top officials from the Foreign Ministry and civilian
bureaucracy were clearly in the dark about the military’s plan to shoot down an
obsolete weather satellite.

--“A Mystery in Beijing,” by David Lague, International Herald Tribune, 06/23/07

32
 Exercise: A Game of Judo Strategy
Consider a game with one incumbent, one potential entrant, and 100 possible buyers. (The
incumbent has sufficient capacity to serve all buyers.) The game unfolds in four stages:
 In the first stage, the potential entrant must decide whether or not to enter the market. If it
enters, it incurs a small, irrecoverable entry cost.
 In stage two, the entrant decides simultaneously on two things:
--the number of buyers to target, and
--the price for its product (the price must be the same for all its buyers).
 In stage three, the incumbent responds to the entrant’s choices by deciding on a
single price at which to offer its own product to all buyers.
 In the fourth and final stage, buyers make their purchase decisions, and each firm
serves the buyers that decide to purchase from it.
Each one of the 100 potential buyers is interested in purchasing one unit of product from
either the incumbent or the entrant. However, only those buyers targeted by the entrant
have the option of purchasing from it. To see how this works, think of the buyers as
arrayed in a certain order and labeled as buyer 1, buyer 2, …, buyer 100. Suppose, as
an example, that the entrant has targeted 10 buyers. Then, buyers 1 through 10 each
get to decide whether to purchase from the incumbent or the entrant (or from neither).
Buyers 11 through 100 each get to decide whether to purchase from the incumbent (or
not at all). This second group of buyers does not have the option of purchasing from the
entrant. Likewise, if the entrant has targeted 20 buyers, then buyers 1 through 20 have
the option of buying from it; buyers 21 through 100 do not.
33
 Exercise cont’d

Q1: Suppose that: (a) each buyer has a willingness-to-pay of $200 for one
unit of either the incumbent’s or the entrant’s product; and (b) both
incumbent and entrant have a $100 unit cost of serving buyers. (A buyer’s
“willingness-to-pay” is the maximum the buyer would pay—to end up just
indifferent between purchasing or not.) Formulate a strategy for the entrant.
How much money can the entrant make?
 
Q2: Now suppose that: (a) each buyer has a willingness-to-pay of $200 for
one unit of the incumbent’s product and $160 for one unit of the entrant’s
product; and (b) the incumbent has a $100 unit cost and the entrant a $120 unit
cost. (The incumbent has a “dual competitive advantage.”) Formulate a new
strategy for the entrant. How much money can the entrant now make?
 
Q3: In what sense is there a judo effect in this game?

34 Based on “Judo and the Art of Entry,” by Vijay Krishna, Harvard Business School Case, 187-165; and “Judo Economics: Capacity
Limitation and Coupon Competition,” by Judith Gelman and Steven Salop, Bell Journal of Economics, 14, 1983, 315-325
 Appendix: Second-Mover Advantage

In a zero-sum game, it is always (weakly) better to go second than first

(r, c) - (r, c)
Col c
 …
r If Row moves first, Row gets
Row  ... maxr minc (r, c)
Col
 c
…

- (r, c) (r, c)
Row r
 …
c If Row moves second, Row gets
Col  ... minc maxr (r, c)
Row
 r
…
But we can see that
35 minc maxr (r, c)  maxr minc (r, c)
 Eliminating the Second-Mover Advantage

Let  be a random strategy for Row

Let  be a random strategy for Column

If Row moves first, and Column observes only the randomization by Row,
then Row gets
max min (, ) = max minc (, c)  maxr minc (r, c)

If Row moves second, and observes only the randomization by Column,

then Row gets
min max (, ) = min maxr (r, )  minc maxr (r, c)

The Minimax Theorem says that

min max (, ) = max min (, )

The second-mover advantage is eliminated

36