Deliverable 6: Construct And Analyze A Game Tree

Deliverable 6 Construct And Analyze A Game Treecompetencythis Compet

Construct and analyze a game tree for a scenario involving a telecom company's decision to upgrade infrastructure. Use backward induction to determine the optimal strategy, explaining each step clearly. Specifically, explain why a game tree is preferable over a payoff matrix, identify who moves first, draw and interpret the initial game tree, remove non-credible threats, perform backward induction in stages, and conclude with the optimal strategy.

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In strategic decision-making scenarios involving multiple agents with conflicting interests, game theory provides essential tools for analyzing optimal strategies. When considering a telecom company's decision to upgrade infrastructure, utilizing a game tree offers a more dynamic and sequential visualization than a payoff matrix, especially when moves are made in sequence with potential threats and negotiations. This approach reveals the strategic interdependence of decisions and allows for the identification of credible threats and rational responses through backward induction, ensuring decisions are stable and justifiable.

First, it's critical to understand why a game tree is preferred over a payoff matrix in this context. A payoff matrix encapsulates the outcomes of simultaneous moves by all players and is best suited for analyzing static, one-shot games where players choose their strategies without knowledge of the others' choices. Conversely, a game tree explicitly models the sequential order of moves, enabling players to observe the previous actions before making subsequent decisions. This dynamic representation captures the strategic complexities such as threats, promises, and revisions of plans, all integral to real-world negotiations like infrastructure investment decisions. Therefore, a game tree is necessary here to account for the temporal structure of decisions and to analyze credibility in threats and promises effectively.

In the scenario under consideration, the first mover is the telecom company contemplating the upgrade. The company must decide whether to invest in upgraded lines or not. The customer base's response—whether customers choose to buy or not—acts as the second move, upon observing the company's initial decision. This sequential structure aligns with the depiction of a game tree, where the first node represents the company's decision, and subsequent branches represent customer responses.

Constructing the game tree begins with the company's decision node. The company can choose to upgrade (U) or not (N). If the company upgrades, the customer then chooses whether to buy (B) or not buy (NB). If the company refrains from upgrading, customers face either service complaints or existing infrastructure, and their responses are limited to continue with current services or switch providers, but for simplicity, the focus remains on the upgrade decision cycle.

Visualizing the initial game tree reveals the possible sequences of moves and outcomes. However, in complex interactive settings, players might attempt to threaten future actions that are not credible—such as threatening to stop customer service or to devalue the company's reputation if the other side does not comply. These non-credible threats, which the threatened party would not believe or cannot credibly execute, distort the strategic landscape. In the initial game tree, such threats manifest as branches that suggest irrational or impossible actions. To refine the analysis, these non-credible threats are pruned, resulting in a more realistic tree that reflects credible strategies.

Performing backward induction involves starting from the final decision nodes—here, the customer’s response after the company's upgrade decision. The customer evaluates the payoff of buying or not based on the company's offer, which is informed by their understanding of the company's strategy and the credibility of threats. The analysis proceeds by considering the customer's rational choice at each terminal node, eliminating strategies that involve non-credible threats, and working backwards to identify the company's optimal initial move.

The first backward induction step happens at the customer's decision node following the company's decision to upgrade. At this node, the customer chooses to buy or not, based on which action yields the higher payoff. If buying provides a higher payoff considering the company's offer, the customer will buy; otherwise, they’ll refrain. The company then anticipates this rational response and adjusts its strategy accordingly.

After analyzing the customer’s response, the game tree is redrawn to incorporate the rational choice outcomes, eliminating any non-credible threats or irrational branches. This revised tree guides the second backward induction step—evaluating the company's initial decision—by considering the customer’s rational response. The company chooses the action (upgrade or not) that maximizes its payoff, given the expected customer reaction.

Performing the second step involves comparing the payoffs for the company’s options, considering the customer's rational responses identified earlier. If the customer responds favorably to an upgrade (i.e., makes purchase decisions that offer higher payoffs), the company will prefer to upgrade. Conversely, if the response is unfavorable, the company will prefer to refrain from upgrading. This analysis concludes the backward induction, identifying the optimal initial move for the company.

The result of this meticulous analysis is the determination of an equilibrium strategy—whether the company should upgrade infrastructure or not—to maximize its payoff considering customer behavior. This strategic decision is stable because it accounts for credible threats and the rational reactions of all involved parties, illustrating the importance of game-theoretic tools in operational decision-making.

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