The Chain Store Game
A monopolist (Player A) has branches in 20 towns. He faces 20 potential competitors, one in each town, who will be able to choose IN or OUT. They do so in sequential order and one at a time. If a potential competitor chooses OUT, he receives a payoff of 1, while A receives a payoff of 5. If he chooses IN, he will receive a payoff of either 2 or 0, depending on the response of Player A to his action. Player A, in response to a choice of IN, must choose one of two pricing strategies, COOPERATIVE or AGGRESSIVE. If he chooses COOPERATIVE, both player A and the competitor receive a payoff of 2, and if A chooses AGGRESSIVE, each player receives a payoff of 0.
These outcomes lead to two theories for the game, the induction (game theoretically correct version) and the deterrence theory (weakly dominated theory):
Read more about this topic: Chainstore Paradox
Famous quotes containing the words chain, store and/or game:
“We are all bound to the throne of the Supreme Being by a flexible chain which restrains without enslaving us. The most wonderful aspect of the universal scheme of things is the action of free beings under divine guidance.”
—Joseph De Maistre (1753–1821)
“Just across the Green from the post office is the county jail, seldom occupied except by some backwoodsman who has been intemperate; the courthouse is under the same roof. The dog warden usually basks in the sunlight near the harness store or the post office, his golden badge polished bright.”
—Administration for the State of Con, U.S. public relief program (1935-1943)
“Wild Bill was indulging in his favorite pastime of a friendly game of cards in the old No. 10 saloon. For the second time in his career, he was sitting with his back to an open door. Jack McCall walked in, shot him through the back of the head, and rushed from the place, only to be captured shortly afterward. Wild Bill’s dead hand held aces and eights, and from that time on this has been known in the West as “the dead man’s hand.””
—State of South Dakota, U.S. public relief program (1935-1943)