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Welcome to the course, and welcome to the first video.

In this video, we'll learn some of the basic tools of game theory.

And we'll learn how to use game theory and to analyze a competitive problem in a

structured way. Now let's get started with a simple

example, a simplified example even, of a real life situation.

We have Sensodyne and Colgate, both selling toothpaste.

They share the market equally and they're thinking of launching an advertising

campaign. So let's see we've got these two players

Sensodyne and Colgate, both selling toothpaste.

They share the market equally, and let's just fictitiously say that total sales

overall are going to be 10 million pounds.

Each of the companies considers launching an advertising campaign at a cost of 2.5

million and we assume that there is no effect on total market size and sales.

So people aren't going to brush their teeth more often just because there's

more advertising. They're not willing to pay more for

toothpaste just because there's advertising. The only thing that happens

is that you can increase your market share.

And your market share increases to 80% if you advertise but the other firm does

not. So.

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With this situation, taking that situation and trying to structure that in

a way, we need to do the following things.

We need to figure out who the players are.

This is easy in this case of course. We've got Sensodyne and Colgate.

We need to know what the actions are, and the actions in this case are to advertise

or not to advertise. And we need to know what the rules of the

game are. And the rules of the game here are quite

simple. They basically state that both will have

to decide simultaneously. Now you may ask, well whenever do people

make a decision completely simultaneously?

Or when do firms make a decision simultaneously?

Simultaneously basically just says that, or a simultaneous decision just says that

one player makes their decision without knowing what the other player has done

and vice versa. So that's our definition of simultaneity.

What are the payoffs? Well, if both advertise

they're going to make 5 million each from the market.

So the market is 10 million they split up into 5 million each and both of them

spent money on advertising, 2.5 million. Okay.

So overall their net profits are going to be 2.5 million.

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If both don't advertise they each make 5 million.

They just split the market, and they haven't spent money on

advertising. If only one firm advertises, then that

firm is going to make 80% of the market. That's 8 million pounds minus 2 and a

half million pounds because they spend, money on their advertising

campaign. So that's going to be 5.5 million and

vice-versa, the firm that doesn't advertise is left with 20% of the market,

that amounts to 2 million pounds. So, with these pieces

of information, we know what the players are, the strategies or the actions, we

know what the rules of the game are and we know what the payouts are. We can then go

ahead and try to draw this as a matrix. Okay, so the matrix is going to tell us

here the players, that's Sensodyne and Colgate.

We know the actions, that's 'advertise' or 'not to advertise' for both players.

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Simultaneous games are drawn as a matrix, as we've done it here.

Now what we need are basically the payoffs.

So the payoffs if both advertise as we've seen there are 5 million minus 2.5

million that's equal to 2.5 million and it's 2.5 million here as well.

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So If both don't advertise they make 5 million each.

If one of them, Sensodyne, advertises, they get 5 1/2 million.

If Colgate does not advertise in that case, they get 2 million.

And of course, the other way around, the same, okay?

So, having taken this situation, some form of advertising, two firms, some sort

of market profits and so on, we were able to structure this in a form of a matrix.

And what's important is basically what we mean by a strategy.

Right so after all you are taking this course to learn about competitive

strategy and for that, we need to have a working definition

for this course. And the working definition for now is, a

strategy is a player's plan of action in a game.

Okay, so here it's fairly simple we have 2 choices, we have to run an ad campaign

or not to run an ad campaign. For now this sounds very simple even

trivial but it's going to be very useful later on

to know what a strategy is when we're trying to analyze more complex

situations. So in this video we've learned the basic

tools of game theory. We've learned how to use game theory to

analyze a competitive problem like the one we've seen, in a structured way.

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In the next video, we're going to use what we just learned to find the best

strategies in competitive situations, right?

Right now we're not saying anything about what's going to happen, but in the next

video, we're going to look at figuring out what optimal strategies are.

So for now. To stay on, learn more exciting stuff

about analyzing competition, but first try to check if what we've done right now

is something you've understood. So do the in video quiz first

and check which are the important parts of the game.

If you struggle at any point do check out the forum and find help from your fellow

students. Okay, so I'll see you in a second

hopefully, cheers, bye.