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Game Theory Case Study Assignment & Discussion Part 1 AMD/INTEL Price wars Advanced Micro Devices (AMD) and Intel are major rivals since 2000s. Interestingly, the products of AMD and Intel are not commodities. In fact, they are quite specialized with unique advantages. When AMD introduced its new pathbreaking Athlon processor they were confronted with the choice of lowering their price or hold the price at the current levels because the new processor was indeed very good. AMD and Intel would have profits of $500m each if they did not engage in a price war. However, if one of them slashed its prices and other one did not, the profits would be $700m for the one who slashed the price and $100m for the one who did not. If both decided to cut prices then each would have profits of $300m each. What should AMD do? Part II Parents often face a difficult problem punishing their children for bad behavior. Children have a great sense that the parents' threat to punish may not be credible. They quickly recognize that the punishment may hurt the parents as much as the children. The most frequently used reasoning to avoid this inconsistency is that the punishment is as good for the child's own good. How can parents do a better job at making their threat to punish* bad behavior credible? Using the framework of game theory, please explain how you would deal with this situation. This is not a discussion of what parenting style one should use but a discussion of specifically how you would structure a threat to punish a child's actions. You can use regular narrative (i.e. describe in words what you would do) or a matrix format of pay-offs and outcomes. I will post the analysis of this case in the course announcements later on in the course so be sure to check in the Announcement section of the course. *Note: I use the word punish in a very specific game theoretical sense. Punishment = some sort of negative payoff for the child. Please try to look beyond the term or use the term that feels more appropriate to you. Game Theory Case Study Assignment & Discussion Part 1 AMD/INTEL Price wars Advanced Micro Devices (AMD) and Intel are major rivals since 2000s. Interestingly, the products of AMD and Intel are not commodities. In fact, they are quite specialized with unique advantages. When AMD introduced its new pathbreaking Athlon processor they were confronted with the choice of lowering their price or hold the price at the current levels because the new processor was indeed very good. AMD and Intel would have profits of $500m each if they did not engage in a price war. However, if one of them slashed its prices and other one did not, the profits would be $700m for the one who slashed the price and $100m for the one who did not. If both decided to cut prices then each would have profits of $300m each. What should AMD do? Part II Parents often face a difficult problem punishing their children for bad behavior. Children have a great sense that the parents' threat to punish may not be credible. They quickly recognize that the punishment may hurt the parents as much as the children. The most frequently used reasoning to avoid this inconsistency is that the punishment is as good for the child's own good. How can parents do a better job at making their threat to punish* bad behavior credible? Using the framework of game theory, please explain how you would deal with this situation. This is not a discussion of what parenting style one should use but a discussion of specifically how you would structure a threat to punish a child's actions. You can use regular narrative (i.e. describe in words what you would do) or a matrix format of pay-offs and outcomes. I will post the analysis of this case in the course announcements later on in the course so be sure to check in the Announcement section of the course. *Note: I use the word punish in a very specific game theoretical sense. Punishment = some sort of negative payoff for the child. Please try to look beyond the term or use the term that feels more appropriate to you
