SGT term-paper topics and guidelines

(BM 2013-15 Term V)

You cannot discuss the project topic with me beyond basic clarifications.
Interpretation / understanding of the issues / problems carry weight. Clearly write
down the assumptions under which you are setting up the model.
More credit will be given to the more general models (which, in turn, means less
credit for solving the games with numbers).
Just follow the instructions given to each topic. Be brief and to the point!
Please submit a hard copy of your work.
DEADLINE: 4-30 PM of December 15, 2014.

Gr B1

Members

B13017
B13036
B13056

Ayush Vashishtha
Nikhil Vankamamidi
Sumit Taneja

Auction as a bilateral trading mechanism

Background:
The basic mechanism is as follows: The potential buyer(s) submit(s) their bids and the
potential seller(s) submit(s) their ask prices simultaneously to an auctioneer. Then the
auctioneer chooses the market clearing price. All the sellers who asked less than the price
chosen by the auctioneer sell, and all buyers who bid more than that price buy at that
price. Many variants of this trading mechanism have been used in commodity exchanges,
and also in stock exchanges such as NYSE and AMEX.
For the purpose of the term-paper consider a single buyer-single seller model.
Set up the model as follows:
The seller names as asking price,
. If

, and the buyer simultaneously names an offer price,

, then trade occurs at price

, then no trade occurs.

The buyers valuation for the sellers good is

, the sellers is . These valuations are
private information and are drawn from independent uniform distributions on [0,1]. If the
buyer gets the good for price , then the buyers gain is
; if there is no trade, then
the buyers gain is zero. If the seller sells the good for price , then the sellers gain is
; if there is no trade, then the sellers gain is zero.
In this static Bayesian game, a strategy for the buyer is a function
specifying the
price the buyer will offer for each of the buyers possible valuations. Likewise, a strategy

for the seller is a function

specifying the price the seller will demand for each of
the sellers valuations. For simplicity assume these price functions to be linear.
Find a pair of prices

that constitute a Bayesian Nash equilibrium.

Assume that the buyer and the seller are risk neutral.
Instructions:

Write an introduction (within 120 words)

Set up the model as instructed
Find the Bayesian Nash equilibrium of the game
Write an interpretation of the result (within 150 words).

Gr B2

Members

B13082
B13083
B13088

Dhanoosha Penmetsa
Dhruv Gupta
Harshan Agrawal

Reputation in debt market

Background:
When borrowers deal with banks over multiple periods they have an incentive to develop
reputations for repaying loans Set up a sequential move reputation game (which of course
is a game of incomplete information) based model to examine the rationale for such
behavior.
For the purpose of the term-paper consider a two-period game between a bank and a
borrower.
Set up the model as follows:

First nature draws the type of the borrower. The borrower either has a risky
project or a sure project. (Expected return from the risky project is less than the certain
return from the sure project; however, the risky project yields a return much higher than
the certain return from the sure project, albeit with a very low probability. There is no
question of default and bankruptcy when the project is sure; however, when the high
return associated with the risky project is not realized the borrower defaults and goes
bankrupt.)

The bank doesnt know the type of the borrower, but believes that the borrower is
risky (one that has a risky project) with probability p.

At time-0 the bank chooses a period-1 (period-1 begins at time-0 and ends at
time-1) interest rate.


The borrower decides whether to borrow at that rate. If the borrower decides to
borrow at the interest rate specified by the bank, s/he will have to service the debt at time1 (which is at end of period-1). If the borrower defaults in period-1, the game ends.

If the borrower services the period-1 debt in time, at time-1 the bank chooses a
period-2 (period-2 begins at time-1 and ends at time-2) interest rate.

The borrower decides whether to borrow in period-2 at that rate. If the borrower
decides to borrow at the interest rate specified by the bank, s/he will have to service the
debt at time-2 (which is at end of period-2).

Assume that the players are risk neutral (expected payoff maximize).

Instructions:

Write an introduction (within 120 words)

Set up the model as instructed
Represent the game in extensive form
Characterize (provide conditions on interest rates) the perfect Bayesian
equilibrium of the game
Interpret the result from a managerial perspective (within 150 words.)

Gr B3

Members

B13060
B13167
B13135

Vatsal Agrawal
Rishabh Pandey
Anshul Savant

Quality Certification
Background:
It is a common practice in many services industries to get the business processes
(particularly the ones involving customer interface) certified to follow certain standards
(ISO standards, Malcolm-Baldrige standards etc.) Set up a signaling game based model to
examine the rationale for such certification.
For the purpose of the term-paper consider a signaling game between a firm and a
potential customer.
Set up the model as follows:

First nature draws the type of the firm. The firm is either a high quality firm or
a low quality firm. (You will have to specify in the model what differentiates between a
high quality firm and a low quality firm.)


The firm decides whether to go for a quality certification or not. There should be a
cost of getting the certification, which may be different for a high quality firm vis--vis
a low quality firm. (Thats a clear hint!)

The potential customer doesnt know if the firm is high quality or low
quality, but believes that the firm is high quality with some probability. However, the
customer can see if the firm is a certified one. The customers action is either to buy
(sign a service provision contract) or not.

Price is determined by market (competitive) and is an exogenous variable to the

model. However, the utility (or value of the service / product) to the customer depends on
whether the firm is a high quality one or a low quality one.
Instructions:

Write an introduction (within 120 words)

Set up the model as instructed
Represent the game in extensive form
Characterize (provide conditions) the perfect Bayesian equilibria (both
pooling and separating) of the game
Interpret the result from a managerial perspective (within 150 words.)

Gr B4

Members

B13126
B13165
B13166

Ajay Khaitan
Ramaswamy P
Ranjani Iyer

Price war during boom (and collusion during recession)

Background:
It is observed that competing firms that tend to fight (price war) during boom,
cooperate (price collusion) during recession. For example, e-retailers like Music Box
and Amazon that tend to undercut prices on new albums do not show any price dispersion
on old albums. The demand for an album is generally at its peak immediately after
release and over time it reduces, until it gets stabilized after a point in time. Another
example can be taken from the US automobile industry during the recession of 2008-9. In
2008 General Motors (GM) reported that its sales have dropped 23 % over one year. It
sold fewer vehicles in 2008 than any year since 1959. Ford sales were down by about
20% over 2007, the lowest number of sales in 47 years. Chrysler sales slid 30% for the
same period. However, there was no significant reduction in prices. Moreover, each of
them asked the Congress for bailout, and supported the bailout pleas of each other.
For the purpose of the term-paper consider a simple repeated game between two Bertrand
competitors in boom and in recession.

Set up the model as follows:

Scenario 1 (Boom): Consider an infinitely repeated price game between Firm A

and Firm B that produces homogenous products at identical cost conditions.

Find the collusive price and the condition under which the
collusion is sustainable.

Scenario 2 (Recession): During recession, the market demand function shifts

inward. Consider an infinitely repeated price game between Firm A and Firm B under the
new demand condition, but at cost condition identical to scenario 1.

Find the collusive price and the condition under which the
collusion is sustainable.

Comparing the collusive prices and conditions under which the collusion is
sustainable, draw your conclusions.
Instructions:

Write an introduction (within 120 words)

Set up the model as instructed
Show that under given discounting factor it may not be possible to sustain
collusion in a boom scenario, though it may be possible to sustain
collusion under the same discounting factor in a recessionary scenario.
Interpret the result from a managerial perspective (within 150 words.)

Gr B5

Members

B13103
B13114
B13119

Puskar Pandey
Shelly
Suprabhat Tiwari

Advertising and price competition in a differentiated products duopoly

Background:
It is typical of FMCG brands that are close substitutes to use competitive advertising.
Competitive advertisements are directed towards poaching consumers from the rival,
rather than expanding the market. Coke vs. Pepsi, Horlicks vs. Complan, Colgate vs.
Pepsodent etc. are some examples.
Does increased expenditure on competitive advertisement result in increased sales, price
or profit?
For the purpose of the term-paper, consider a simple differentiated products static
(constant demand) duopoly where the firms compete in advertising as well as in prices.
Set up the model as follows:

There are two firms in the market A and B.

The products are very close substitutes.
The market demand is linear.
The cost of production is same for both firms. There is no fixed cost of
production. The variable cost per unit of output is constant, and hence the
variable cost function is linear.
The only other cost incurred by the firms is advertising expenditure.
Specifically take the demand functions:
and
Also consider the cost functions:
Where i is the advertising expenditure of firm i, c is the constant average
variable cost per unit, qi is the quantity of firm i, pi is the price of firm i
and pj is the price of firm j (i = a, b and j i).
Note that the demand and advertising expenditures are for a given period.
However, the demand remains constant over periods.

Now, solve the following 2-stage game:

In stage 1, the firms simultaneously chose advertising expenditure, and in stage 2 they
simultaneously choose prices.
Instructions:

Write an introduction (within 120 words)

Set up the model as instructed
Find out how quantity (or market share), price and profit depends on the
advertising expenditure.
Interpret the result from a managerial perspective (within 150 words.)

Gr B6

Members

B13021
B13048
B13113

Devika Handa
Rushil Tapadia
Shashank Gandhi

Stock repurchase as a takeover defense

Background:
It is a known fact that target management resists takeover bids through stock repurchases.
The manager cares both about retaining his job and about the value of the firm. Thus, the
amount that the privately informed manager is willing to overpay in repurchasing stock
depends upon what he knows about the value of the firm under his control. A repurchase

offer acts as a positive signal of firm value (under current management) to the target
firm's shareholders and convinces them not to sell out to the raider (potential acquirer).
For the purpose of the term-paper develop a simple model as instructed below.
Set up the model as follows:
Assumptions:
1. There are N shareholders and each shareholder holds 1/N share of the firm.
2. The firm value is either Vh or Vl, where Vh > Vl.
3. The management knows the value of the firm.
4. Outsiders (the shareholders and the raider firm) believe that the firm value is Vh
with probability and Vl with probability (1-).
5. The raider placed a takeover bid at price Pr > [Vh + (1-) Vl] / N. This means the
raider offers a price more than the expected value of a share.
6. All shareholders are identical, i.e., if there is reason for one shareholder to sell out
to the raider, there is reason for all shareholders to sell out.
Now consider the following signaling game between the incumbent management and one
representative shareholder.
The timing of the game is as follows:
First Nature draws the type of the firm. The firm is a high value firm (value Vh)
with probability and is a high value firm (value Vl) with probability (1-).
The incumbent management makes a repurchase offer at price Pm > Pr.
Observing whether the management made a repurchase offer at a price higher
than the raiders price, the shareholder decides whether to sell out to the raider, or
to sell out to the incumbent management, or to retain their stocks.
Instructions:

Write an introduction (within 120 words)

Set up the model as instructed
Show that there exists a unique separating sequential perfect Bayesian
equilibrium, where the management will make a repurchase offer if an
only if the firm is a high value firm, and the shareholders will retain their
stocks if the repurchase offer is made.

Interpret the result from a managerial perspective (within 150 words.)