Game Theory 101 Full Course - Game Theory 101: Chain Store Paradox

When a chain store faces multiple potential opponents in different markets, it has an incentive to initiate a price war against early entrants to deter future entrants. This lecture examines the perfect Bayesian equilibrium of the "chain store paradox", where chain stores that face large losses from price wars nevertheless engage in them to secure higher profits in other markets. The alleged paradox turns out to be a bluffing behavior seen in semi-separating strategies. 0:00 Introduction 0:43 Complete Information Setup 2:53 Solving the Complete Information Game 7:10 Firms with Credible Retaliation 9:18 Incomplete Information Setup 10:48 Solving the Incomplete Information Game 13:46 Separating Equilibrium 16:09 Pooling Equilibrium 18:11 Semi-Separating Equilibrium 25:14 Resolving the "Paradox"