Strategic Moves: Side Payments

Side payments are a strategy where one player offers something to the opponent to persuade them to act in a way that benefits the first player.

Let's consider two competing pharmaceutical companies: Nova and Erks.

Nova starts by deciding whether to engage in the price war or to collude.

In the original sequential game, Nova indulges in a price war and receives a payoff of 100 dollars, while Erks gets 300 dollars.

If Nova plans to offer a side payment to Erks.

If Nova chooses to collude and Erks also promises to collude, Nova will pay Erks 200 dollars.

That way, Erks will earn a payoff of 700 dollars at node B, 500 dollars earned initially, and 200 dollars given by Nova.

This way, both earn higher payoffs; Nova gets a payoff of 300 dollars, and Erks receives a payoff of 700 dollars more than they would have earned without the side payment.

Incorporating strategic moves and side payments allows for more complex and realistic scenarios in sequential games. These moves enable players to change the game's dynamics, sometimes securing a more favorable and mutually beneficial outcome than is possible without such tactics.