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CHAPTER THIRTEEN-GAME THEORY - Coggle Diagram
CHAPTER THIRTEEN-GAME THEORY
gaming and strategic decisions
noncooperative vs cooperative games
cooperative - negotiate binding contracts-allow to plan joint strategies
noncooperative - negotiation & enforcement of binding contracts are not possible
essential to understand opponent's P.O.V- deduce likely responses to your actions
dominant strategy
optimal no matter what the opponent does
equilibrium- each firm is doing their best regardless of competitors
The Nash Equilibrium
dominant strategies
- im doing my best
no matter
what you do
nash equilibrium- im doing my best
given
what you are doing
maximin strategies
maximizes minimum gain
prisoner's dilemma
insight into difficulty of maintaining cooperation
often firms fail to cooperate even when it would make them better off
cooperation is not in the best interest of the individual player
repeated games
game where actions & payoffs are taken/received repeatedly
tit-for-tat strategy
a player responds in kind to an opponent's previous play- cooperating or retaliating
infinitely repeated game
the expected gains from cooperating > those from undercutting
competitor and I repeatedly set prices, forever- cooperating
sequential games
players move in turn- responding to each other's actions
example- stackelberg model
extensive form of a game
representation of possible moves on a decision tree
threats, commitments, credibility
empty threats
decide who makes the first move- get first mover advantage
reputation
give strategic advantage
entry deterrence
incumbent firm- convince any potential competitor that entry will be unprofitable
strategic trade policy and international competition
a conuntry can benefit from adopting policies that give domestic industries a competitive advantage
prevent other firms in other countries entering the world market- domestic industries enjoy higher prices & greater sales
create credible threat to potential entrants-> scale economies- satisfy world demand at low price, other firms enter -> price driven below profit point