Games of Perfect Information, Predatory Pricing and the Chain-Store Paradox

The thesis of this paper is that finite, noncooperative games possessing both complete and perfect information ought to be treated like one-player decision problems. That is, players ought to assign at every move subjective probabilities to every subsequent choice in the game and ought to make decisions via backward induction. This view is in contrast with the gametheoretic approach of Nash equilibrium. After expanding on this view for games in the abstract in Sections 2 and 3, attention is turned in Section 4 to an example due to Reinhard Selten, called the chain-store paradox, which possesses the flavor of a situation involving a predatory-pricing monopolist. It is argued that for the chain-store game the decision-analytic approach leads, under certain assumptions, to more realistic outcomes than the standard Nash-equilibrium approach.