Myopia and competitive reputations in de-escalating promotional competition: Game theoretic intuition versus naive decision-making

Several researchers and practitioners have observed that sales promotions are prisoner's dilemmas where the Nash equilibrium dictates that firms offer promotions every period. Adopting a behavioral game theory approach, this dissertation investigates the role of myopia and competitive reputations in de-escalating promotional wars. The research uses a decision-making game setting within the context of trade promotional decisions and assesses the extent to which naive decision makers act as “intuitive game theorists”. The findings suggest a strong reputation effect, and an effect of myopia that is quite counter to game theoretic reasoning. Naïve decision makers were found to be limitedly-rational game theorists and did occasionally seem to display an understanding of the basic tenets of game theory. On the other hand, players also frequently departed from strict rationality by reacting irrationally to beliefs about their competitor. The final section of the dissertation assesses the implications of this research for the descriptive validity of game theoretic models in general and offers pointers for continued research in the area.