Sequential Game Tree: Currently The Comcast Building Is The

Sequential Game Treea Currently The Comcast Building Is The Tallest

Currently, the Comcast building is the tallest building in Philadelphia. Suppose another corporation, company X, is deciding whether or not to build an even larger building than the Comcast building in an effort to dominate the Philadelphia skyline. If X does not enter, Comcast gets a payoff of 100 and X gets 0. If X enters, Comcast must decide whether or not to add to their already existing building.

Draw a sequential game tree starting at the decision of whether company X should enter the skyline for the following two scenarios. Assume company X, after building its skyline-dominating building is better off in both scenarios when Comcast does not add to its existing building than when it does. i. The threat of Comcast adding to their existing structure is not credible, meaning the payoff Comcast receives when adding to existing building is less than the payoff it would receive if it did not add to its building. ii. The threat of Comcast adding to their existing structure is credible, meaning the payoff Comcast receives when adding to its existing building is more than the payoff it would receive if it did not add to its building.

Explain how this relates to why companies may want to invest in large amounts of infrastructure when entering a market.

Paper For Above instruction

The strategic interaction between companies in markets with significant infrastructure investments can be effectively modeled using sequential game trees, especially when understanding competitive dynamics such as skyline dominance in urban environments. In the context of the Philadelphia skyline, the decision whether Company X should enter the market by building a taller skyscraper involves analyzing potential responses from incumbent firms like Comcast, and understanding the credibility of threats within these interactions is crucial.

Scenario 1: Non-Credible Threat

In the first scenario where Comcast’s threat to add to its building is not credible, Comcast’s payoff when adding to the existing building is less than its payoff if it chooses not to add. Specifically, Comcast’s payoff when adding (say, 60) is less than the payoff when not adding (say, 100). For Company X, the decision to enter hinges on its expectations about Comcast’s actions. Since Comcast’s threat is not credible, Company X perceives that Comcast will not escalate its investment to deter entry, as the cost or loss associated with adding to the building outweighs potential gains. Consequently, Company X’s best response is to enter the market, secure dominance, and benefit from the payoff of building the tallest skyscraper, knowing that Comcast’s retaliation is not credible and unlikely to deter this move.

The game tree in this context begins with Company X’s decision to enter or not. If X enters, Comcast then chooses whether to add to its building or not. Given the non-credible threat assumption, Comcast’s decision to add is unlikely, thus favoring entry for Company X. This illustrates that when threats are not credible, entrants are more willing to invest heavily, anticipating that incumbents’ retaliatory actions are not credible and will not materialize.

Scenario 2: Credible Threat

Contrarily, in the second scenario where Comcast’s threat to add is credible—meaning the payoff for adding (say, 110) exceeds the payoff for not adding (say, 50)—the strategic landscape changes. Here, Comcast’s threat to add to its building is believable, and Company X anticipates that if it enters, Comcast will indeed expand to prevent X from building a taller building. Given this, Company X faces a strategic dilemma: entry may trigger costly escalation by Comcast, which could diminish X’s payoff or even make entry unprofitable.

In this case, Company X might either choose to avoid entry to prevent escalation or try other strategies to mitigate competitive threats, such as seeking alliances or finding niche markets. The game tree reflects that credible threats influence strategic decisions heavily, and firms must assess the credibility of their rivals’ threats when planning infrastructure investments.

Implications for Infrastructure Investment

This analysis draws a parallel to why firms might invest heavily in infrastructure when entering markets. Large investments serve as credible signals of commitment and can alter competitive dynamics. When a company commits substantial resources, it raises the stakes for rivals, potentially deterring entry or escalation. Conversely, if threats or commitments are perceived as non-credible, firms may under-invest or fail to create barriers to entry, leading to increased market competition and reduced profitability.

Furthermore, credible investments can shape market perceptions, signaling the firm’s seriousness and capability to sustain competitive advantages. For instance, building a tall skyscraper in a city like Philadelphia signals financial strength and commitment, which can discourage competitors from attempting to challenge dominance. This strategic use of infrastructure investment aligns with the concept of commitment strategies in game theory, where credible commitments help influence rivals’ expectations and actions.

In conclusion, the interplay between credible threats and investments in infrastructure significantly impacts market entry strategies and competitive outcomes. Firms must carefully evaluate the credibility of their strategic moves and consider substantial infrastructure investments as tools to shape market dynamics, deter entry, and reinforce their positions.

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