Value Games

Abstract

Large literatures in operations and economics analyze dynamic models of profit-optimizing firms. The insights and algorithms in these literatures can be adapted to maximize value if the model excludes external strategic interactions and risk of bankruptcy. The insertion of external strategic interactions in such a model converts it from a dynamic optimization model to a sequential game. This paper shows that the resulting sequential games are analogous to dynamic optimization models of the firm in the following sense. Insights and algorithms based on sequential games with a profit criterion and negligible bankruptcy risk can be adapted to their value-criterion counterparts. The illustrations in the paper are a model of the palm oil supply chain in Indonesia and a dynamic oligopoly in which inventories affect competition between firms.