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Chapter 9-1: Game theory and strategic behavior - Coggle Diagram
Chapter 9-1: Game theory and strategic behavior
Strategic decisions are common in economics
In oligopoly market, decisions of participants affect others and draws reactions
Thus participants act strategically
Game behaviour
Branch of economics, formulates interdependencies and helps us understand the strategic behavior.
3 basic elements of a game
Available strategies, actions, or decisions for each player.
The payoff for each player in every combination of actions
Strategy
Combination of
actions
taken by a
single
player till the end of the game
Best response
A strategy that provides the highest payoff for a player.
Dominant Strategy
A strategy that always yields the highest layoffs than other strategies no matter what strategies other players choose.
If both players have a dominant strategy, we expect both to use it, hence
dominant strategy equilibrium
Strong suggestive of the likely outcome of the game.
Every dominant strategy equilibrium is a Nash equilibrium
1 more item...
Dominated Strategy
A strategy that always yields a lower payoff than other strategies no matter what strategies other players choose.
Nash Equilibrium
Combination of strategies, which is each player's strategy is her or his best choice, taking the other player's strategies as given.
Outcome
Combination of
strategies
picked by
all players
till the end of the game
1.Players
Advertising Game
Normal form
Possible outcomes of the game
The game is perfectly symmetric
Prisoner's dilemma
Game in which every player has a dominant strategy, and when each plays it, the resulting payoff is smaller than if each player would have played a dominated strategy
Provides insight into the difficulty in maintaining cooperation.
Commitment problems can cause a socially inefficient outcome.
Economies of cartel
Cartel
A formal coalition of firms that agree to restrict output or to control price to increase economic profit.
Collusion
The firms informally agree to restrict output or to control price to the same end.
Oligopolists confront a case of prisoner's dilemma. Issue with credibility of commitment and promises causes the cooperation to not last and fail.
In some cases. the cooperation is mutually beneficial, usually because of two basic explanations.
Repeated game
tit-for tat strategy
, doing whatever the other firm does.
Limits defection, and works when repetition does not have finite or predetermined end date.
Employing commitment devices