<https://www.coursera.org/lecture/advanced-valuation-and-strategy/how-to-solve-a-simultaneous-game-eIWY0#lecture>
<http://schema.org/transcript>
"Welcome, I'm Han Smit, I'm a Professor of Corporate Finance at Erasmus School of Economics. In this webcast, we're going to illustrate an application of game theory to estimate the outcome and solve a simultaneous move game. You will learn to analyze and solve a game when both firms are in an innovation race to introduce a new product. This innovation race involves an investment in new product development between two competing ventures. So on one hand we have Firm P, and on the other hand we have its rival, let's say Firm S. Each firm plans to develop a new technology for autopilot electric cars, and expect subsequent commercialization applications. So both firms can wait or invest in new product development. So we have four different scenarios. In scenario one, at immediate investment, the total market value of 400 million is shared equally among the two firms. So when both firms invest, simultaneously in new product development, they both share equally the value creation of 400 million and they receive an NPV of 200 million, each of them. In scenario two and three, it can also be the case that one of them moves first and the other one doesn't invest or waits. In this case, the first mover captures the complete market. If Firm P moves first with a new product and Firm S waits, Firm P preempts the market opportunity with a total value of 400 million, eroding Firm S's chances to enter the market, who receives 0. In the other case, Firm S moves first and Firm P waits. Firm P receives 0, and Firm S receives the whole market value. In scenario four, the last scenario, both firms wait with pushing the technical boundaries and keep the flexibility of option value of not investing. This increases total market value with the flexibility value from 400 to 600. And in this case we assume they both share equally 600 and a value of waiting is 300 million. So given this payoff, how should we solve this game? Look at the figure. First consider investing by Firm P. If Firm P invests its payoff, if Firm S waits, dominates waiting because 400 is higher than 300. But also in the case Firm S invests, investing for Firm P dominates waiting because 200 is higher than 0. So independent of Firm S's choices, Firm P always has a higher payoff when investing and this is called the dominant strategy. Or in other words, applying rule two, the waiting strategy is dominated or can be eliminated. We can actually apply a similar reasoning for Firm S. For Firm S, investing early dominates waiting, because 400 is higher than 300. And if Firm P invests, 200 is larger than 0. So Firm S has a dominant strategy to invest independent of the strategy of Firm P. The resulting Nash equilibrium as a consequence is the two dominant strategies, and we end up here in the lower right cell. Both firms end up having a NPV of 200. This is the Nash equilibrium and is actually lower than the cooperative equilibrium, which is (wait, wait). In that case, firms would receive 300. But the competition between the two firms forces them to speed up investments. The simultaneous move game is depicted in the normal form. And a normal form is the matrix-like form as you see here on the left-hand side. Another way of expressing this game is the extensive form or tree-like form. In the extensive form, we see the branches of each firm as the actions of the firms. So Firm P can wait or invest and Firm S can also wait or invest. The dotted line in the middle is important. It means that they have the same information and that the action moves simultaneously. To summarize: in this webcast we solved a simultaneous move game by identifying dominant strategies, intended to determine the optimal actions of the rivals. We saw that competition may force companies to speed up investment. In the next game, we will show how the sequence of moves between rivals may affect this outcome. So let's consider that!"
<https://www.coursera.org/lecture/advanced-valuation-and-strategy/how-to-solve-a-simultaneous-game-eIWY0>