Decision Making using Game Theory: An introduction for managers

106Two-person mixed-motive games of strategyEricssonStrategyIssueshareslaterIssuesharesnowNokiaIssueshareslaterIssuesharesnow3, 3 2, 44, 2 1, 1Figure 6.7Pay-off matrix for exploitation games.Example 6.3 An exploitation gameNokia and Ericsson, two publicly quoted Scandinavian companies in the telecommunicationssector, are considering a share issue to raise funds for investment.The Wnancial considerations are complicated by uncertainty over the USFederal Reserve’s intention regarding money rates. All other things being equal,it would be better for both companies to wait until the next quarter’s inXationWgures are known.The worst case scenario (Wnancially) occurs when both companies decide toissue shares now, since they will both be undersubscribed, and the maximumpay-oV for a company occurs when it issues shares and the other does not. Insuch circumstances, market demand would support a high issue price and theissuing company would be perceived among investors as the market leader,though the non-issuing company would also beneWt from increased sectorconWdence. Figure 6.7 is the ordinal pay-oV matrix for the game.Once again, there are no dominant or inadmissible strategies and theminimax principle, in which both companies choose to issue later, fails.Although the minimax strategies intersect at (3, 3), they are unstablesince both players are tempted to deviate from it and both regret theirselections once the other’s selection becomes known.The two equilibrium points on Figure 6.7 are the asymmetric oneswith pay-oVs (4, 2) and (2, 4). If Nokia chooses to opt out, Ericsson cando no better than choose the opposite, since to opt out as well would