Game Theory and Business Applications

398 Pages·2011·4.29 MB·English

GAME THEORY AND
BUSINESS APPLICATIONS
INTERNATIONAL SERIES IN
OPERATIONS RESEARCH & MANAGEMENT SCIENCE
Frederick S. Hillier, Series Editor
Stanford University
Saigal, R. / LINEAR PROGRAMMING: A Modern Integrated Analysis
Nagurney, A. & Zhang, D. / PROJECTED DYNAMICAL SYSTEMS AND
VARIATIONAL INEQUALITIES WITH APPLICATIONS
Padberg, M. & Rijal, M. / LOCATION, SCHEDULING, DESIGN AND
INTEGER PROGRAMMING
Vanderbei, R. / LINEAR PROGRAMMING: Foundations and Extensions
Jaiswal, N.K. / MILITARY OPERATIONS RESEARCH: Quantitative Decision Making
Gal, T. & Greenberg, H. / ADVANCES IN SENSITIVITY ANALYSIS AND
PARAMETRIC PROGRAMMING
Prabhu, N.U. / FOUNDATIONS OF QUEUEING THEORY
Fang, S.-C., Rajasekera, J.R. & Tsao, H.-S.J. / ENTROPY OPTIMIZATION
AND MATHEMATICAL PROGRAMMING
Yu, G. / OPERATIONS RESEARCH IN THE AIRLINE INDUSTRY
Ho, T.-H. & Tang, C. S. / PRODUCT VARIETY MANAGEMENT
El-Taha, M. & Stidham , S. / SAMPLE-PATH ANALYSIS OF QUEUEING SYSTEMS
Miettinen, K. M. / NONLINEAR MULTIOBJECTIVE OPTIMIZATION
Chao, H. & Huntington, H. G. / DESIGNING COMPETITIVE ELECTRICITY MARKETS
Weglarz, J. /PROJECTSCHEDULING: Recent Models, Algorithms & Applications
Sahin, I. & Polatoglu, H. / QUALITY, WARRANTY AND PREVENTIVE MAINTENANCE
Tavares, L. V. / ADVANCED MODELS FOR PROJECT MANAGEMENT
Tayur, S., Ganeshan, R. & Magazine, M. / QUANTITATIVE MODELING FOR SUPPLY
CHAIN MANAGEMENT
Weyant, J./ ENERGY AND ENVIRONMENTAL POLICY MODELING
Shanthikumar, J.G. & Sumita, U./APPLIED PROBABILITY AND STOCHASTIC PROCESSES
Liu, B. & Esogbue, A.O. / DECISION CRITERIA AND OPTIMAL INVENTORY PROCESSES
Gal, T., Stewart, T.J., Hanne, T./ MULTICRITERIA DECISION MAKING: Advances in MCDM
Models, Algorithms, Theory, and Applications
Fox, B. L./ STRATEGIES FOR QUASI-MONTE CARLO
Hall, R.W. / HANDBOOK OF TRANSPORTATION SCIENCE
Grassman, W.K./ COMPUTATIONAL PROBABILITY
Pomerol, J-C. & Barba-Romero, S. / MULTICRITERION DECISION IN MANAGEMENT
Axsäter, S. / INVENTORY CONTROL
Wolkowicz, H., Saigal, R., Vandenberghe, L./ HANDBOOK OF SEMI-DEFINITE
PROGRAMMING:Theory, Algorithms, and Applications
Hobbs, B. F. & Meier, P. / ENERGY DECISIONS AND THE ENVIRONMENT: A Guide
to the Use of Multicriteria Methods
Dar-El, E./ HUMAN LEARNING: From Learning Curves to Learning Organizations
Armstrong, J. S./ PRINCIPLES OF FORECASTING: A Handbook for Researchers and
Practitioners
Balsamo, S., Personé, V., Onvural, R./ ANALYSIS OF QUEUEING NETWORKS WITH BLOCKING
Bouyssou, D. et al/ EVALUATION AND DECISION MODELS: A Critical Perspective
Hanne, T./INTELLIGENT STRATEGIES FOR META MULTIPLE CRITERIA DECISION MAKING
Saaty, T. & Vargas, L./ MODELS, METHODS, CONCEPTS & APPLICATIONS OF THE ANALYTIC
HIERARCHY PROCESS
GAME THEORY AND
BUSINESS APPLICATIONS
edited by
Kalyan Chatterjee
Pennsylvania State University
and
William F. Samuelson
Boston University
KLUWER ACADEMIC PUBLISHERS
NEW YORK, BOSTON, DORDRECHT, LONDON, MOSCOW
eBookISBN: 0-306-47568-5
Print ISBN: 0-7923-7332-4
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Table of Contents
List of Contributors vii
Acknowledgements x
1. Introduction 1
Kalyan Chatterjee and William Samuelson
2. Game Theory Models in Finance 17
Franklin Allen and Stephen Morris
3. Game Theory Models in Accounting 49
Chandra Kanodia
4. Game Theory Models in Operations Management 95
and Information Systems
Lode Li and Seungjin Whang
5. Incentive Contracting and the Franchise Decision 133
Francine Lafontaine and Margaret E. Slade
6. Cooperative Games and Business Strategy 189
H. W. Stuart, Jr.
7. Renegotiation in the Repeated Amnesty Dilemma,
with Economic Applications 213
Joseph Farrell and Georg Weizsäcker
8. Reputation and Signalling Quality Through
Price Choice 247
Taradas Bandyopadhyay, Kalyan Chatterjee, and
Navendu Vasavada
9. Game Theory and The Practice of Bargaining 273
Kalyan Chatterjee
vi
10. Auctions in Theory and Practice 295
William F. Samuelson
11. The Economics of Auctions and Bidder Collusion 339
Robert C. Marshall and Michael J. Meurer
12. Activity Rules for an Iterated Double Auction 371
Robert Wilson
Index 387
CONTRIBUTORS
Franklin Allen is the Nippon Life Professor of Finance and Economics at the
Wharton School of the University of Pennsylvania. From 1990-1993 he was
Vice Dean and Director of Wharton Doctoral Programs and from 1993-1996
he was Executive Editor of the Review of Financial Studies. In 1999 he
served as President of the Western Finance Association and President of the
Society for Financial Studies. In 2000, he is serving as President of the
American Finance Association. Dr. Allen's main areas of interest include
corporate finance, asset pricing, financial innovation and comparative
financial systems.
Taradas Banyopadhyay is Professor of Economics at the University of
California, Riverside. His current research interests include individual
decision making and social choice, and his work has been published widely in
academic journals.
Kalyan Chatterjee is the Distinguished Professor of Management Science
and Economics at Pennsylvania State University. His research applies game
theory to a variety of incomplete information models: arbitration and
bargaining, coalition formation, and market competition. For many years, he
has taught graduate courses in game theory and negotiation.
Joseph Farrell is Professor of Economics and Affiliate Professor of Business
at the University of California, Berkeley, where he is the founding Director of
the Competition Policy Center. In 1996-97 he was Chief Economist at the
Federal Communications Commission. He is Editor of the Journal of
Industrial Economics. His work has addressed game theory (particularly
renegotiation and communication), standard-setting, industrial organization,
and telecommunications.
viii Chatterjee and Samuelson: Game Theory and Business Applications
Chandra Kanodia is the Honeywell Professor of Accounting at the
University of Minnesota. He serves on the editorial boards of the Journal of
Accounting Research, the Review of Accounting Studies, and the Asia
Pacific Journal of Accounting and Economics. His published research has
appeared in such journals as Econometrica, the Accounting Review, and
Management Science.
Francine Lafontaine is Professor of Business Economics and Public Policy
at the University of Michigan Business School, and a faculty research fellow
at the National Bureau of Economic Research. Her research focuses on
vertical relationships and contracting, with a special emphasis on the
application of recent advances in contract theory to the analysis of
franchising arrangements. She has published her research in such journals as
the Journal of Political Economy, the RAND Journal of Economics, and the
Journal of Industrial Economics.
Lode Li is a Professor at Yale School of Management. His research
addresses a broad range of issues in managerial economics and operations
management. These include operations strategies in competitive, time-
sensitive markets, the coordination of global operations, and the value of
information in a competitive environment. His recent work focuses on
incentives for vertical chain coordination and information sharing in the
presence of horizontal competition.
Robert C. Marshall is Professor and Head of the Economics Department at
Pennsylvania State University. His research has primarily focused on bidder
collusion in auctions and procurements. His papers in this area have appeared
in the Journal of Political Economy, the American Economic Review, and
the Quarterly Journal of Economics.
Michael J. Meurer is Associate Professsor at Boston University School of
Law. He previously taught in the law school at the University at Buffalo and
in the economics department and law school at Duke University. He has
published in economics and law journals on topics including antitrust law,
intellectual property law, and industrial organization. He has consulted with
Contributors ix
the Federal Trade Commission on merger issues relating to patent licensing,
and with AID on antitrust issues in Mongolia.
Stephen Morris is Professor of Economics at Yale University. His recent
research in theoretical and applied game theory has emphasized the
importance of players’ uncertainty about others’ beliefs.
William F. Samuelson is Professor of Economics and Finance at Boston
University School of Management. His research on decision making under
uncertainty, competitive bidding, and bargaining has been published in
economics, finance, and management science journals. His teaching centers in
the areas of microeconomics, decision making, and game theory. Currently,
he is working on the fourth edition of his textbook in managerial economics.
Margaret Slade is a professor of economics at the University of British
Columbia in Vancouver, Canada and a member of GREQAM in Marseille,
France. She works in the area of applied industrial organization, which
includes econometric modeling of the games that firms play when they
interact in markets as well as the games that agents play when they interact
inside firms.
Harborne W. Stuart, Jr. is an Associate Professor in the Management
Science Department at Columbia Business School. In his research, he studies
business decisions using game-theoretic approaches. His research includes
the further development of “interactive decision theory,” which takes strategic
uncertainty as the primary focus, and “added value theory,” which uses
cooperative game theory to study businesses as the central players in
economic value creation. Application of this research is principally to the
fields of strategy, negotiation, and operations.
Navendu Vasavada co-founded Lumin Asset Management in 1998 and
manages its $50 million hedge fund. Before this, he held academic
appointments in Finance at Pennsylvania State University, the Wharton
School, and the Wharton Center for Applied Research. Early in his
professional career, he worked at the Indian Petrochemicals Corporation and