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management and union representatives negotiate a contract, they

recognize that the bargaining will repeat itself three or so years down

the road when the new contract expires. By contrast, a buyer and

seller negotiating a house sale are unlikely to meet again. In one-shot

situations, competitors usually are out for all they can get. In an

ongoing competition, they often behave much differently. All they can

get now is tempered by the impact on what they might get in the

future. If management negotiates too stringent a contract this time,

the union may be more militant the next time. As we shall see, if a

noncooperative situation is repeated or ongoing, a clear opportunity

is provided for tacit communication and understanding to take place

over time.

5.Amount of Information. The degree of information one competitor

has about another is one of the most important factors in a

competitive situation. In many industries, secrecy is crucial. Detroit’s

automakers carefully guard their new designs. At the same time, some

firms invest large sums attempting to obtain information about their

competitors. Management usually knows who its main rivals are, but it

may have only sketchy knowledge of their intentions, views, and

ultimate objectives. Normally, the firm has limited information about

its competitors’ organizations, such as their intentions and costs. This

raises the questions: What would management like to know about its

competitors? What would management like them to believe about its

own intentions?

In the rest of this chapter, we focus primarily on two-party settings under

perfect information, that is, where the firms have all immediately relevant infor-

mation about each other. (Examples of competitive settings with imperfect

information and two or more players are presented in Chapters 15 and 16.) We

take up zero-sum and non–zero-sum games and explore the implications of

repetition and tacit communication.

ANALYZING PAYOFF TABLES

The starting point for a game-theoretic analysis of any competitive situation is

a description of the players, their strategies, and their payoffs. Here is a moti-

vating example.

JOCKEYING IN THE TV RATINGS GAME The profits of the three major tele-

vision networks—CBS, NBC, and ABC—depend significantly on the ratings

achieved by their prime-time programs. The higher the ratings, the higher

the price the network can charge for advertising and the greater the number

of advertising spots it can sell. To keep things simple, we restrict our attention

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