Thinking Strategically by Avinash K. Dixit & Barry J. Nalebuff

• Strategic thinking is the art of outdoing an adversary, knowing that the adversary is trying to do the same to you.
• The science of strategic thinking is called game theory.
• Work, even social life, is a constant stream of decisions. [...] The common element in these situations is that you do not act in a vacuum. Instead, you are surrounded by active decision-makers whose choices interact with yours. This interaction has an important effect on your thinking and actions.
• Like the general, you must recognize that your business rivals, prospective spouse, and even your child are intelligent and purposive people. Their aims often conflict with yours, but they include some potential allies. Your own choice must allow for the conflict, and utilize the cooperation. Such interactive decisions are called strategic, and the plan of action appropriate to them is called a strategy.
• The branch of social science that studies strategic decision-making is called game theory.
• At times there is no clearly correct solution, only important ways to cope with the problem.If you have the lead, the surest way to stay ahead is to play monkey see, monkey do.
• There are two ways to move second. You can imitate as soon as the other has revealed his approach or wait longer until the success or failure of the approach is known. The longer wait is more advantageous in business because, unlike sports, the competition is usually not winner-take-all. As a result, market leaders will not follow the upstarts unless they also believe in the merits of their course.
• Most economic, political, or social games are different from games such as football or poker. Football and poker are zero-sum games: one person’s gain is another person’s loss. But in the prisoner’s dilemma, there are possibilities for mutual advantage as well as conflict of interest..
• We usually refer to the players in a game as “opponents”, but you should remember that on occasion, strategy makes strange bedfellows.
• Although being inflexible can sometimes wear down an opponent and force him to make concessions, it can equally well allow small losses to grow into major disasters.
• The point is that if you do the same thing all the time, the opposition will be able to counter you more effectively by concentrating its resources on the best response to your strategy.
• Mixing your plays does not mean rotating your strategies in a predictable manner. Your opponent can observe and exploit any systematic pattern almost as easily as he can the unchanging repetition of a single strategy. It is unpredictability that is important when mixing.
• The importance of randomized strategies was one of the early insights of game theory.
• [...] if someone is willing to sell a futures contract, you should not be willing to buy it. And vice versa. The strategic insight is that other people’s actions tell us something about what they know, and we should use such information to guide our own action.
• We do not live and act in a vacuum. Therefore, we cannot assume that when we change four behavior everything else will remain unchanged.
• The general point is that in games it is not always an advantage to seize the initiative and move first. This reveals your hand, and the other players can use this to their advantage and your cost. Second movers may be in the stronger strategic position.
• The essence of a game of strategy is the interdependence of the player’s decisions. These interactions arise in two ways. The first is sequential: The players make alternating moves. The second kind of interaction is simultaneous: The players act at the same time, in ignorance of the other’s current actions.
• When you find yourself playing a strategic game, you must determine whether the interaction is simultaneous or sequential. [...] Then you must fit your strategy to the context.
• The general principle for sequential-move games is that each player should figure out the other player’s future responses, and use them in calculating his own best current move.
• Rule 1: Look ahead and reason back.
• Anticipate where your initial decisions will ultimately lead, and use this information to calculate your best choice.
• Successful application of the rule of looking ahead and reasoning back needs a better visual aid. A “tree diagram” of the choices in the game is one such aid.
• If the game is going to end in a finite number of moves no matter which path is followed, then we can in principle solve the game completely. Solving the game means finding out who wins and how. This is done by reasoning backward along the tree.
• For any game with a finite number of sequential moves there exists some best strategy.
• Some simple games can be solved completely.
• The combination of explicit logic from backward reasoning and rules of thumb for valuing intermediate positions based on experience is a useful way to tackled complicated games other than chess.
• There are two general features of bargaining that we must first take into account. We have to know who gets to make an offer to whom, i.e. the rules of the game. And then we have to know what happens if the parties fail to reach an agreement.
• Different negotiations take place under differing rules.
• An essential feature of negotiations is that time is money. When negotiations become protracted, the pie begins to shrink.
• Getting all of nothing is winning the battle and losing the war.
• The general point is that for the principle of looking ahead and reasoning back to apply, it is essential that earlier moves be observable to those who choose later.
• So we have another condition for the validity of the principle of looking ahead and reasoning back: strategies must be irreversible.
• One of the general morals from this story is that if you have to take some risks, it is often better to do this as quickly as possible.
• In general, a player has a dominant strategy when he has one course of action that outperforms all others no matter what the other players do. If a player has such a strategy, his decision becomes very simple; he can choose the domination strategy without worrying about the rival’s moves. Therefore it is the first thing one should seek.
• The dominance in “dominant strategy” is a dominance of one of your strategies over your other strategies, not of you over your opponent. A dominant strategy is one that makes a player better off than he would be if ue used any other strategy, no matter what strategy his opponent uses.
• A second common misperception is that a dominant strategy requires that the worst possible outcome playing the dominant strategy be better than the best outcome of some other strategy.
• Rule 2: If you have a dominant strategy, use it.
• Do not be concerned about your rival’s choice. If you do not have a dominant strategy, but your rival does, then anticipate that he will use it, and choose your best response accordingly.
• A word of caution. We developed the concept of a dominant strategy for games with simultaneous moves. Care must be taken in using it if moves are sequential. Because the nature of the strategic interaction is different, the idea of a dominant strategy is no longer the same.
• Not all games have dominant strategies, even for one player. In fact, dominance is the exception rather than the rule. Although the presence of a dominant strategy leads to very simple rules for action, these rules are inapplicable to many actual games.
• Just as a dominant strategy is uniformly better than every other strategy, a dominated strategy is uniformly worse than some other strategy.
• Just as you choose your dominant strategy if you have one, and can be sure that your rival will choose his if he has one, you should avoid your dominated strategies if you have any, and you can be sure that your rival will avoid his, if he has any.
• Rule 3: Eliminate any dominated strategies from consideration, and go on doing so successively.
• When all simplifications based on dominant and dominated strategies have been used, the game is at its irreducible minimum level of complexity and the problem of the circular reasoning must be confronted head-on. What is best for you depends on what is best for your opponent and vice versa.
• Rule 4: Having exhausted the simple avenues of looking for dominant strategies or ruling out dominated ones, the next thing to do is to look for an equilibrium of the game.
• A game is a situation of strategic interdependence: the outcome of your choices (strategies) depends upon the choices of another person or persons acting purposively. The decision makers involved in a game are called players, and their choices are called moves. The interests of the players in a game may be in strict conflict; one person’s gain is always another’s loss. Such games are called zero-sum. But more typically, there are zones of commonality of interests as well as of conflict; there can be combinations of mutually gainful or mutually harmful strategies. Nevertheless, we usually refer to the other players in a game as one’s rivals.
• The moves in a game may be sequential or simultaneous.
• In a game of sequential moves, there is a linear chain of thinking: If I do this, my rival can do that, and in turn I can respond in the following way… Such a game is studied by drawing the game tree. The best choices of moves can be found by applying Rule 1: Look forward, and reason backward.
• In a game with simultaneous moves, there is a logical circle of reasoning: I think that he think that I think that… This circle must be squared; one must see through the rival’s action even though one cannot see it when making one’s own move. To tackle such a game, construct a table that shows the outcomes corresponding to all conceivable combinations of choices. Then proceed in the following steps:
• Begin by seeing if either side has a dominant strategy--one that outperforms all of that side’s other strategies, irrespective of the rival’s choice. This leads to Rule 2: If you have a dominant strategy, use it. If you don’t have a dominant strategy, but your rival does, then count on his using it, and choose your best response accordingly.
• Next, if either side has a dominant strategy, see if either has a dominated strategy--one that is uniformly worse for the side playing it than another of its strategies. If so, apply Rule 3: Eliminate dominated strategies from consideration. Go on doing so successively.
• Finally, if there are neither dominant nor dominated strategies, or after the game has been simplified as far as possible using the second step, apply Rule 4: Look for an equilibrium, a pair of strategies in which each player’s action is the best response to the other’s.
• If there is no such equilibrium, that usually means that any systematic behavior can be exploited by one’s rivals, and therefore indicates the need for mixing one’s plays.
• In practice, games can have some sequential moves and some simultaneous moves; then a combination of these techniques must be employed to think about and determine one’s best choice of actions.
• The statistical literature describes false positives as Type I errors and false negatives as Type II errors.
• Behind every good scheme to encourage cooperation is usually some mechanism to punish cheaters.
• When several alternative punishments could deter cheating and sustain cooperation, how should one choose among them? Several criteria have a role. Perhaps most important are simplicity and clarity, so that a player thinking of cheating can easily and accurately calculate its consequences. Next comes certainty. Players should have confidence that defection will be punished and cooperation rewarded.
• If punishments are as big as possible, then mistakes will be very costly. To reduce the cost of mistakes, the punishment should be the smallest size that sufficient to deter cheating. Minimal deterrence accomplishes its purpose without imposing any extra costs when the inevitable mistakes occur.
• Tit-for-tat is a variation of the “eye for an eye” rule of behavior: do unto others as they have done onto you. More precisely, the strategy cooperates in the first period and from then on mimics the rival’s action form the previous period.
• [Robert] Axelrod argues that tit-for-tat embodies four principles that should be evident in any effective strategy: clarity, niceness, provocability, and forgivingness. Tit-for-tat is as clear and simple as you can get. It is nice in that it never initiates cheating. It is provocable, that is, it never lets cheating go unpunished. And it is forgiving, because it does not hold a grudge for too long and is willing to restore cooperation.
• At best, tit-for-tat ties its rival.
• [...] We believe that tit-for-tat is a flawed strategy. The slightest possibility of misperceptions results in a complete breakdown in the success of tit-for-tat. This flaw was not apparent in the artificial setting of a computer tournaments, because misperceptions did not arise. But when tit-for-tat is applied to real-world problems, misperceptions cannot be avoided and the result can be disastrous.
• The problem with tit-for-tat is that any mistake “echoes” back and forth.
• What tit-for-tat lacks is a way of saying “Enough is enough”. It is dangerous to apply this simple rule in situations in which misperceptions are endemic. Tit-for-tat is too easily provoked. You should be more forgiving when a defection seems to be a mistake rather than the rule. Even if the defection was intentional, after a long-enough cycle of punishments it may still be time to call it quits and try to reestablish cooperation. At the same time, you don’t want to be too forgiving and risk exploitation.
• A useful way to evaluate a strategy is to measure how well it performs against itself. If one thinks in terms of evolution, the “fittest strategies” will become dominant in the population. As a result, they will encounter each other often. Unless a strategy performs well against itself, any initial success will eventually become self-defeating.
• The possibility of misperceptions means that you have to be more forgiving, but not forgetting, than simple tit-for-tat.
• The moral is that it pays to be more forgiving up to a point. Once the probability of mistakes gets too high [...] it is just too easy to be taken advantage of. The large chance of misunderstandings makes it impossible to send clear message through your actions. Without an ability to communicate through deeds, any hope for cooperation disappears.
• The basic properties of clarity, niceness, provocability, and forgivingness seem likely to be true of any good rule of behavior for extricating oneself from a prisoner’s dilemma. But tit-for-tat is too quick to punish someone who has a history of cooperating. We need to find a strategy that is more discriminating: it should be more forgiving when a defection appears to be an exception, and it should punish when defection appears to be the rule.
• The important principle to remember is that when misperceptions are possible, you shouldn’t punish every defection you see. YOu have to make a guess as to whether a misperception has occurred, either by you or by your partner. This extra forgiveness allows others to cheat a little on you. BUt if they cheat, they use up their goodwill. When the eventual misperceptions arise you will no longer be inclined to let the incident pass. Opportunism on the part of your opponent will be self-defeating.
• A strategic move is designed to alter the beliefs and actions of others in a direction favorable to yourself. The distinguishing feature is that the move purposefully limits your freedom of action.
• To give a strategic move credibility, you have to take some other supporting action that makes reversing the move too costly or even impossible. Credibility requires a commitment to the strategic move.
• Strategic moves thus contain two elements: the planned course of action and the commitment that makes this course credible.
• An unconditional move gives a strategic advantage to a player able to seize the initiative and move first. Even when you don’t actually move first, you can achieve a similar strategic advantage through a commitment to a response rule. The response rule prescribes your action as a response to the other’s moves. Although you act as a follower, the commitment to the response rule must be in place before others make their moves.
• Response rules fall under two broad categories: threats and promises.
• A threat is a response rule that punishes others who fail to cooperate with you. There are compellent threats [...] and there are deterrent threats.
• A compellent threat is designed to induce someone to action, while a deterrent threat is designed to prevent someone from taking an action. The two threats share a common feature: both sides will suffer if the threat has to be carried out.
• The second category of response rules is promises. This is an offer to reward someone who cooperates with you.
• Again there can be compellent and deterrent promises. A compellent promise is designed to induce someone to take a favorable action, such a stunning state's evidence. A deterrent promise is designed to prevent someone from taking an unfavorable action, such as when the mobsters promise the witness they will take care of him if he keeps his mouth shut. The two promises also share a common feature: once the action is taken (or not taken), there is an incentive to go back on one’s word.
• The common feature to all threats and promises is this: the response rule commits you to actions that you would not take in its absence. If the rule merely says you will do what is best at the time, this is as if there is no rule. There is no change in others’ expectations about your future actions and hence no influence of the rule.
• When it is in your interest to carry out a “threat”, we call this a warning.
• A warning is used to inform others of the effect of their actions. A parent who warns a child that a stove-top is hot, makes a statement of fact, not strategy.
• When it is in your interest to carry out a “promise”, we call this an assurance.
• We emphasize this distinction for a reason. Threats and promises are truly strategic moves, whereas warnings and assurances play more of informational role. Warnings or assurances do not change your response rule in order to influence another party. Instead, you are simply informing them of how you will want to respond based on their actions. In stark contrast, the sole purpose of a threat or promise is to change your response rule away from what will be best when the time comes. This is done not to inform but to manipulate. Because threats and promises indicate that you will act against your own interest, there is an issue of credibility. After others have moved, you have an incentive to break your threat or promise. A commitment is needed to ensure credibility.
• We summarize the options for strategic moves in a chart below. An unconditional movie is a response rule in which you move first and your action is fixed. Threats and promises arise when you move second. They are conditional moves because the response dictated by the rule depends on what the other side does.
• A strategic move is always a preemptive action. The response rule must be in place before the other side moves.
• Observability is not as straightforward as it seems. One need not actually observe the others person’s actions if the action can be inferred from the consequence.
• Just as your unconditional movie must be observable if it is to influence your rival, his actions must be observable if you are to influence them by threats or promises. Otherwise you cannot check his compliance, and he knows this.
• It is never advantageous to allow others to threaten you. You could always do what they wanted you to do without the threat. The fact that they can make you worse off if you do not cooperate cannot help, because it limits your available options. But this maxim applies only to allowing threats alone. If the other side can make both promises and threats, then you can both be better off.
• It is clear that when making a promise, you should not promise more than you have to. If the promise is successful in influencing the other party’s behavior, you expect to carry out your word. This should be done as cheaply as possible, and that means promising the minimum amount necessary.
• The very act of making a threat may be costly. Nations, businesses, and even people are engaged in many games, and wat they did in one game has an impact on all the other games.
• An excessive threat may be counterproductive even in the game in which it is used.
• The theory that a successful threat need never be carried out is fine so long as we are absolutely sure no underforeseen errors will occur.
• The conclusion is that one should strive for the smallest and the most appropriate threat that will do the job--make the punishment fit the crime.
• Sometimes fitting threats are readily available. At other times, there are only excessive threats, which must somehow be scaled down before they can be used. Brinkmanship is perhaps the best scaling device of this kind.
• In most situations, mere verbal promises should not be trusted. As Sam Goldwyn put it, “A verbal contract isn’t worth the paper it’s written on.”
• Credibility is a problem with all strategic moves. If your unconditional move, or threat or promise, is purely oral, why should you carry it out if it turns out not to be in your interest to do so? But then others will look forward and reason backward to predict that you have no incentive to follow through, and your strategic move will not have the desired effect.
• The whole point behind the strategies of Chapter 5 is to change an opponent's expectations about your responses to his actions. This will fail if he believes that you will not carry out the threats or promises you make. Without any effect on his expectations, there will be no effect on his actions.
• A strategically aware opponent will expect you to mislead him and therefore will not be influenced by actions that he perceives as being put on display for his benefit.
• Establishing credibility in the strategic sense means that you are expected to carry out your unconditional moves, keep your promises, and make good on your threats. You cannot count on an ability to fool people. COmmitments are unlikely to be taken at face value. Your commitment may be tested. Credibility must be earned.
• Making your strategic moves credible is not easy. But it is not impossible, either. When we first raised this issue, we said that to make a strategic move credible, you must take a supporting or collateral action. We called such an action commitment.
• We now offer eight devices for achieving credible commitments.
• Establish and use a reputation.
• Write contracts.
• Cut off communication.
• Burn bridges behind you.
• Leave the outcome to chance.
• Move in small steps.
• Develop credibility through teamwork.
• Deploy mandated negotiating agents.
• If you try a strategic move in a game and then back off, you may lose your reputation for credibility. In a once-in-a-lifetime situation, reputation may be unimportant and therefore of little commitment value. But, you typically play several games with different rivals at the same time, or the same rivals at different times. Then you have an incentive to establish a reputation, and this serves as a commitment that makes your strategic moves credible.
• Reputation effect is a two-edged sword for commitment. Sometimes destroying your reputation can create the possibility for a commitment. Destroying your reputation commits you not to take actions in the future that you can predict will not be in your best interests.
• Someone who has a reputation for being crazy can make successful threats that would be incredible coming from a saner and cooler person. In this way, apparent irrationality can become good strategic rationality. One can even cultivate such a reputation. A seeming madman, therefore, may be a superior strategist, because his threats are more readily believed.
• Cutting off communication succeeds as a credible commitment device because it can make an action truly irreversible. An extreme form of this tactic arises in the terms of a last will and testament.
• To reduce the consequences of errors, you want a threat that is no stronger than is necessary to deter the rival. What do you do if the action is indivisible, as a nuclear explosion surely is? You can make the threat milder by creating a risk, but not a certainty, that the dreadful event will occur. This is Thomas Schelling’s idea of brinkmanship.
• Brinkmanship is... the deliberate creation of a recognizable risk, a risk that one does not completely control. It is the tactic of deliberately letting the situation get somewhat out of hand, just because it's being out of hand may be intolerable to the other party and force his accomodation. It means harassing and intimidating an adversary be exposing him to a shared risk, or deterring him by showing that if he makes a contrary move he may disturb us so that we slip over the brink whether we want to or not, carrying him with us.
• As long as there remains a chance of continued business, it will never be worthwhile to cheat. So when a shady character tells you this will be his last deal before retiring, be especially cautious.
• Basic training in the armed forces everywhere is a traumatic experience. The new recruit is maltreated, humiliated, and put under such immense physical and mental strain that the few weeks quite alter his personality. An import habit acquired in this process is an automatic, unquestioning obedience. There is no reason why socks should be folded, or meds made, in a particular way, except that the officer has so ordered. The idea is that the same obedience will occur when the order is of greater importance. Trained not to question orders, the army becomes a fighting machine; commitment is automatic. The seeming irrationality of each soldier thus turns into a strategic rationality.
• Even a company without an outside competitor must worry about competing with its future self.
• Unpredictability is a critical element of strategy whenever one side likes a coincidence of actions, while the other wishes to avoid it.
• The right amount of unpredictability should not be left to chance.
• An easy way to check if randomness is needed is to consider whether there is any harm in letting the other player see your move before he responds. When unpredictability is needed, it would be disadvantageous to move first.
• The [min-max] theorem states that in zero-sum games in which the players’ interests are strictly opposed (one’s gain is the other’s loss), one player should attempt to minimize his opponent’s maximum payoff while his opponent attempts to maximize his own minimum payoff. When they do so, the surprising conclusion is that the minimum of the maximum (min-max) payoffs equal the maximum of the minium (maxi-min) payoffs. Neither player can improve his position, and so these strategies form an equilibrium of the game.
• If it is ever discovered that one player is pursuing a course of action other than the equilibrium random mix, the other player can exploit this to his own advantage.
• If you choose a definite course of action, and the enemy discovers what you are going to do, he will adapt his course of action to your maximum disadvantage. You want to surprise him; the surest way to do so is to surprise yourself. You should keep the options open as long as possible, and at the last moment choose between them by an unpredictable and therefore espionage-proof device. The relative proportions of the device should also be such that if the enemy discovered them, he would not be able to turn the knowledge to his advantage.
• Actions do speak a little louder than words. By seeing what your rival does, you can judge the relative likelihood of matters that he wants to conceal from you.
• The essence of brinkmanship is the deliberate creation of risk. This risk should be sufficiently intolerable to your opponent to induce him to eliminate the risk by following your wishes. This makes brinkmanship a strategic move. [...] Like any strategic move, it aims to influence the other’s actions be altering his expectations. In fact brinkmanship is a threat, but of a special kind. To use it successfully, you must understand its special features.
• Brinkmanship deliberately hides the precipice by creating a situation this is slightly out of control.
• If you are trying to extract some exclusive information from someone, your threat to kill him unless he reveals the secret will not be credible. He knows that when the time comes, you will realize that the secret dies with him, and will have no incentive to carry out the threat.
• Many of the mechanisms that generate risk also prevent a sufficiently accurate control of the degree of that risk.
• There is a final aspect of control that is essential for effective brinkmanship. The threatened party must be able to reduce the risk sufficiently, often all the way to zero, by agreeing to the brinkman’s terms.
• WIth any exercise of brinkmanship, there is always the danger of falling off the brink.
• When two sides are playing a game of brinkmanship and neither side is backing down, there is a chance that the situation will get out of control, with tragic consequences.
• The essential ingredient in making this type of threat credible is that neither you nor your rival knows just where the breaking point lies.
• Game theory provides a natural way to think about social interactions of individuals. Every person has his own aims and strategies; we bring them together and exime the equilibrium of the game in which these strategies interact.
• The inescapable mathematical fact is that for every winner there had to be a loser.
• The important insight from game theory is to recognize early on the potential for future lock-in--once one option has enough of a head start, superior technological alternatives may never get the chance to develop. Thus there is a potentially great payoff in the early stages from spending more time figuring out not only what technology meets today’s constraints, but also what options will be the best for the future.
• A stock price rises when the demand at the old price exceeds the supply. To make money in the market, your goal is to figure out what stocks other people think are going to appreciate.
• The foundation of a democratic government is that it respects the will of the people as expressed through the ballot box. Unfortunately, these lofty ideals are not so easily implemented. Strategic issues arise in voting, just as in any other multi person game. Voters will often have an incentive to misrepresent their true preferences. Nether majority rule nor any other voting scheme can solve this problem, for there does not exist any one perfect system for aggregating up individual’s preferences into a will of the people.
• Measured correctly, the vice president’s vote is roughly equal in importance to that of any senator.
• It seems true that no one grain can turn a non-mound into a mound. And yet, enough grains will turn a molehill into a mountain. A vote is much like a grain of sand. It is hard to imagine how one individual vote will change anyone’s perception of the outcome.
• One way to help keep your vote from getting lost in the rows is to make it stand out: take an extreme position away from the crowd. [...] To the extent that candidates compromise by taking central positions, it may be in some voters interests to appear more extreme than they are. This tactic is effective only up to a point. If you go overboard, you are thought of as a crackpot, and the result is that your opinion is ignored. The trick is to take the most extreme stand consistent with appearing rational.
• Once voters’ preferences are more than one-dimensional, there will not be a median. At that point, the possibility of manipulating the system becomes real.
• The most commonly used election procedure is simple majority voting. And yet the results of the majority-rule system have paradoxical properties, as was first recognized over two hundred years ago by French Revolution here the Marquis de Condorcet.
• The way the U.S. judicial system works, a defendant is first found to be innocent or guilty. The punishment sentence is determined only after a defendant has been found guilty. It might seem that this is a relatively minor procedural issue. Yet, the order of this decision-making can mean the difference between life and death, or even between conviction and acquittal.
• There are three alternatives to determine the outcome of a criminal court case. Each has its merits, and you might want to choose among them based on some underlying principles.
• Status Quo: First determine innocence or guilt, then if guilty consider the appropriate punishment.
• Roman Tradition: After hearing the evidence, start with the most serious punishment and work down the list. First decided if the death penalty should be imposed for this case. If not, then decide whether a life sentence is justified. If, after proceeding down the list, no sentence is imposed, then the defendant is acquitted.
• Mandatory Sentencing: First specify the sentence for the crime. Then determine whether the defendant should be convicted.
• It is possible to apply backward reasoning even when problems lack a fixed endpoint. This is an important feature of most bargaining problems.
• Time is money in many different ways. Most simply, a dollar received earlier is worth more than the same dollar received lter, because it can be invested and earn interest or dividends in the meantime.
• When you can’t observe the quality of effort, you have to base your reward scheme on something you can observe.
• Many production or supply contracts, especially government ones but sometimes also private ones, are awarded be a sealed bid auction. Each firm submits in a sealed envelope the price for which it is willing to do the job. Then all the bids are compared, and the lowest bidder wins, and receives the price that she bid.
• A good incentive scheme must induce you to take into account the true social cost of your action, including any externality you impose on others. This can be done by charging you the costs, or paying you a reward for avoiding them.
• The inevitable truth about gambling is that one person’s gain must be another person’s loss. This it is especially important to evaluate a gamble from the other side’s perspective before accepting. For if they are willing to gamble, they expect to win, which means they expect you to lose. Someone must be wrong, but who?
• Remember that size is not always an advantage: in judo and here in exit strategies, the trick is to use your rival’s bigger size and consequently inflexibility against him.
• An established firm wants to convince potential new competitors that the business would not be profitable for them. This basically means that if they entered, the price would be too low to cover their costs. [...] Installing capacity in excess of the needs of current production gives credibility to the established firm’s threat.
• Liberal or libertarian social philosophies have a basic tenant that everyone has the right to make certain decisions without outside interference.
• Any gambling guide should tell you that slot machines are your worst bet. The odds are way against you.