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Chapter 11 Game Theory and Strategic Behavior: Topics To Be Discussed
Chapter 11 Game Theory and Strategic Behavior: Topics To Be Discussed
Topics to be Discussed
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Gaming and Strategic Decisions
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Dominant Strategies
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The Nash Equilibrium
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Repeated Games
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Maximin Strategy
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Sequential Games : Moving First Advantage ( GRADUATES ONLY )
Gaming and Strategic Decisions
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If I believe that my competitors are rational and act to maximize their own
profits, how should I take their behavior into account when making my own profitmaximizing decisions?
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Example:
Cooperative Game
Players negotiate binding contracts that allow them to plan joint strategies
Example: Buyer and seller negotiating the price of a good or service or a joint
venture by two firms (i.e. Microsoft and Apple)
Dominant Strategies
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A and B are competitors and are deciding whether or not to advertise.
Dominant Strategies
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Observations
1) A has no dominant strategy.
2) B has a dominant strategy (advertise).
Dominant Strategies
Im doing the best I can no matter what you do.
Youre doing the best you can no matter what I do.
Nash Equilibrium
Im doing the best I can given what you are doing
Youre doing the best you can given what I am doing.
Noncooperative
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1)
2)
Questions
What is (are) the Nash Equilibrium(s)?
How could it (they) be reached?
Price Y = Price C
Beach Location Game
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Questions
1) Where will the competitors locate (i.e. where is the Nash equilibrium)?
2) Can you think of any examples of their decision problem?
Maximin Strategy
Consider
If both are rational and informed
Prisoners Dilemma
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1)
2)
Questions
What is the Nash Equilibrium?
What is the maximin solution?
Mixed Stragegies
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Pure Strategies
Strategies in which player make a specific choice or take a specific action (e.g.
advertise or do not advertise)
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Pure strategy will not succeed for either player and there is not a Nash
equilibrium.
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Mixed Strategies
Strategies in which the player makes a random choice among two or more
possible actions, based on a set of chosen probabilities.
Random choice is a Nash equilibrium because if any other choice is made there is
an incentive for the other player to change.
Pareto Efficient:
An allocation is Pareto Efficient if goods cannot be reallocated to make
someone better off without making someone else worse off.
Repeated Games
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In real life, firms play a repeated game.
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With each repetition of the Prisoners Dilemma, firms can develop reputations
about their behavior and study the behavior of their competitors.
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How would this strategy change if the game repeated over a long period of time?
(e.g. price announcements every month)
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Stackelberg Model
Scenario