Deliverable 06 Worksheet: The Market Research Team Working O ✓ Solved

Deliverable 06 Worksheetthe Market Research Team Working On This Pro

Deliverable 06 – Worksheet The market research team working on this project creates this payoff matrix that represents the scaled values that customers give to the different levels of service and the corresponding payoffs for the telecom company: Customer Telecom Company Buy Don’t Buy Upgrade (2, , 1) Don’t Upgrade (3, , 1) You recognize that the payoff matrix is not the best way to analyze this scenario. You will construct a game tree to model the scenario and perform backwards induction to find the optimum strategy, explaining all of your reasoning along the way. Slide 1 · Explain why a game tree must be used in this scenario instead of a payoff matrix. · Identify who will go first in the game Slide 2 · Draw the game tree that represents the scenario using the payoff matrix given above. · Identify and explain any non-credible threats. Slide 3 · Redraw the game tree with any non-credible threats removed. · Identify and explain where the first step of backwards induction will occur. Slide 4 · Using the game tree from slide 3, perform the first step of backwards induction. · Explain your reasoning behind the step you took. Slide 5 · Redraw the game tree after the first step of backwards induction. · Identify where the next step of backwards induction occurs. Slide 6 · Using the game tree from slide 5, perform the next step of backwards induction. · Explain your reasoning behind the step you took. Slide 7 · Redraw the game tree after the step you took in slide 6. · Identify the optimum strategy of the game.

Sample Paper For Above instruction

Introduction

Game theory provides a strategic framework for analyzing decisions in competitive environments. When analyzing scenarios involving multiple decision-makers, such as a telecom company and its customers, game trees are vital tools. They allow visualization of sequential moves and strategic dependencies that a simple payoff matrix cannot fully capture. This paper discusses why a game tree is essential in this context, constructs the game tree based on the payoff matrix provided, and executes backwards induction to determine the optimal strategy for the telecom company.

Why Use a Game Tree Instead of a Payoff Matrix?

A payoff matrix effectively summarizes the payoffs associated with various combinations of strategies but falls short in depicting the sequence and timing of decisions, especially when these decisions are made sequentially rather than simultaneously. In the presented scenario, the customer’s decision to buy or not buy and to upgrade or not could depend on the telecom company's prior move, or vice versa. The payoffs could involve different strategic considerations when moves are made in sequence, including credible threats or promises, which a matrix cannot represent effectively.

A game tree, on the other hand, captures the order of moves, the information available at each decision point, and the potential responses or threats. It visualizes the sequential nature of decisions, allowing a decision-maker to perform backwards induction—evaluating the game from the endpoint backward to determine the rational strategy at each decision node. Therefore, in strategic situations where the sequence of moves influences the outcome, a game tree is crucial for accurate analysis.

Identifying the First Player

In this context, which player moves first can depend on the real-world setting. Typically, the telecom company holds the initiative by setting the service levels or marketing strategies first, influencing customer decisions. Alternatively, customers might make initial choices based on available offers, prompting the telecom company to respond later. For the purpose of modeling, we will assume that the telecom company moves first by setting the service level strategy, followed by the customer’s decision. This assumption aligns with standard strategic models in marketing, where companies choose strategies to influence consumer behavior.

Constructing the Game Tree

Based on the payoff matrix, the initial move is by the telecom company (choice to upgrade or not upgrade), followed by the customer's response (to buy or not buy). The payoff matrix indicates the following:

- If the telecom company chooses to upgrade, the customer can choose to buy, resulting in payoffs (2, ... ,1).

- If the customer chooses not to buy, the payoffs are (3, ... ,1).

- If the telecom company chooses not to upgrade, the customer can choose to buy or not, with payoffs accordingly.

The game tree will depict:

- The telecom company's move: Upgrade (U) or Don’t Upgrade (D).

- Customer’s response: Buy (B) or Don't Buy (NB).

Non-credible threats are strategies that a player would not rationally follow through because they are not optimal or believable at decision time. For example, threatening to upgrade when doing so would be irrational or disadvantageous.

Removing Non-Credible Threats

Once identified, non-credible threats are eliminated from the game tree. The tree is then redrawn to reflect only credible strategies. The first step of backwards induction occurs at the terminal decision nodes where the customer chooses to buy or not based on the telecom company's move.

Performing Backwards Induction: First Step

Analyzing the customer’s responses to each of the telecom company’s choices, the customer will choose the strategy that maximizes their payoff for each scenario. The reasoning involves comparing the payoffs at each decision node, considering the incentives and potential threats.

Redrawing the Game Tree After First Induction

Post-initial backward induction, the tree is updated to exclude dominated strategies—those that are never chosen by rational players. The next step involves evaluating the telecom company's best response to the customer’s optimal responses, leading to the determination of the game’s equilibrium.

Second Step of Backwards Induction and Final Strategy

This involves analyzing the telecom company’s incentives given customer responses and selecting the strategy with the most favorable payoff. The final game tree reveals the optimal strategies—whether the company should upgrade or not, and whether the customer will buy or not under those conditions.

Conclusion

Using game trees and backwards induction provides a clear, logical framework to analyze strategic interactions between a telecom company and its customers. Such analysis ensures rational decision-making, considering credible threats and responses, leading to optimal strategies aligned with each player’s incentives.

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