Game theory for strategic advantage

Lectures: 2 sessions / week, 1.5 hours / session

Game theory is applied in many other courses offered at Sloan. These applications are wide-ranging: Games played between competing firms in 15.013 (Industrial Economics); games played between firms and their suppliers and between managers and their employees in 15.903 (Managing the Modern Organization); not to mention applications in strategy, negotiations, international macroeconomics, corporate finance, etc.

A single course could not suffice to study even a fraction of these particular applications in any depth. While the course is designed to complement Sloan's other economics and strategy offerings, it is self-contained. There are no prerequisites beyond the Core economics course 15.010 or equivalent: 15.010 / 15.011 Economic Analysis for Business Decisions, 15.015 Macro and International Economics, or 14.01 Principles of Microeconomics.

A game is a multi-person decision problem: Tic-tac-toe and chess are games, but game-playing is also serious business. Managers frequently play games both within their firm (with other divisions and subordinates) as well as outside (with competitors, customers, and even capital markets). In turn, politicians, lobbyists, and other stakeholders play games with firms (e.g., when designing auctions or regulations).

The goal of this course is to enhance your ability to think strategically in such complex, interactive environments. In particular, the course emphasizes four themes for acquiring advantage in games:

My view is that the important ideas of game theory are best mastered not at the level of some abstract theory but in the context of real examples. For this reason, we will discuss numerous real-world examples and analyze games that arise frequently in business settings.

To deepen your thinking in a concrete setting, a crucial element of the course is a team project in which students will identify a real-world game of interest, analyze it using the tools of the course, and offer concrete strategic advice to some player in the game.

My goal is to teach game theory, not mathematics. That being said, examples and cases alone do not suffice to get a deeper appreciation and understanding of the material, so some general parts of game theory will be introduced as well. You will discover a fascinating paradox: The more transparent the mathematics, the more interesting and challenging the issues that can arise.

To complement the formal analysis, we will use an interactive approach that includes in-class live games, discussion of take-home games, as well as two problem sets.

The course will move from the abstract towards the concrete. In the first part of the course (Classes 1–11), we will cover the foundations and a wide spectrum of applications of game theory. In the second part (Classes 12–22) we will put the foundations to work in three multi-week, advanced applied segments. The advanced applications will be:

Classes 12–14: Long-run Relationships

Classes 15–18: Auctions and Market Design

Classes 19–21: Communication, Credibility, and Reputation

Exemplary team projects will be presented and discussed in the final week (Classes 22–24).

There is no required textbook for the course. Required and supplementary readings are listed in the Readings section. For further reading, the following text is a good source (note that earlier editions would work fine):

Dixit, Avinash, Susan Skeath, and David Reiley. Games of Strategy. 3rd ed. W. W. Norton & Company, 2009. ISBN: 9780393931129.

In addition, we will assign a number of Harvard (and other) cases.

Grading will depend on class participation, two problem sets, and a team project. Class participation will include games played during class, games to be prepared ahead of class, as well as class attendance and the standard forms of useful participation.

These components of the course will receive the following weights:

The class participation grade is equally determined by the following factors.

In-class Games: In several lectures, we will play a game in class that will need everyone's participation. It will be important for your own learning and your classmates' that you attend and participate.

Before-class Games: A few games require preparation before class. This will involve completing and submitting a 1–2 page worksheet, or a web form, taking no more than 20 minutes per game. Full participation credit will be given for a thoughtful effort.

Your team must provide strategic advice to a player of a "real-world" game. (You need not gather actual data. It suffices to consider a hypothetical scenario that could be real.) Team project deliverables include an initial proposal and final project with an appendix. See the Assignments section for additional details.

Timeline: The team project has the following parts: (i) team formation by Session 5, (ii) project proposal by Session 10, (iii) project progress report by Session 21, and (iv) final project on Session 23. A progress report (which is not graded) is due in Session 21 because some projects will be selected for in-class presentations during Sessions 22 and 23.

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