9781118041581

the extensive formof the game.) The first move is MNF’s: whether to invest or

not. If MNF does invest, the next move (at the time the mine becomes opera-

tional) is DC’s: whether to honor the 50–50 agreement or to expropriate the

mine. In the game tree, squares represent points of decision, and monetary

payoffs are shown at the branch tips of the tree. Here both players’ payoffs are

shown: MNF’s first, then DC’s. (Political considerations aside, we presume that

the monetary payoffs accurately portray the objectives of the parties.)

Furthermore, although it is easy to envision other actions and reactions by the

parties, we have kept things simple: one move for each player.

At the initial move, should MNF invest in the mine? To answer this ques-

tion, MNF’s management need only look ahead to DC’s subsequent move

and the ensuing payoffs. Once the mine is operational, DC can be expected

to expropriate it; DC certainly prefers an $80 million payoff to a mere $50

million from cooperation. Foreseeing this (and the resulting $20 million

loss), MNF wisely decides not to invest. The parties find themselves on the

horns of a dilemma. Both would gain handsomely from a cooperative agree-

ment. But under the current circumstances, such an agreement is unen-

forceable. DC’s position is particularly vexing. It can promise MNF that it will

not expropriate the mine. But talk is cheap. Given the economic stakes, the

promise is not credible. Even if DC intended to honor the agreement out of

the goodness of its heart, how could it credibly convince MNF of its good

intentions?

If the desirable cooperative outcome is to be achieved, the parties must

structure an agreement that alters DC’s incentives to expropriate. DC will

418 Chapter 10 Game Theory and Competitive Strategy

FIGURE 10.1

Moving toward an

International

Agreement

Game trees are solved

from right to left.

Anticipating that DC

will expropriate, MNF

chooses not to invest

in the first place.

0, 0

Invest

Do not invest

agreement

Honor cooperative

Expropriate

50, 50

–20, 80

MNF

DC

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