Strategic interactions and equilibrium

N B need a new model other than individual decision making

because there are now other factors affect the equilibrium such as
Politics conflict within a party
a
macro economic policy

model of strategic interaction a simultaneous more

game
primatives
a A set of players N E 1,2 n
b for each player i in N a set of actions
description of what
Ai a b 3 eachplayer cheesegiffanims r
outcome
i Language a profile of actions is a vector a az an
specifying for each
player i in N an action ai in Ai
C A preference over the set all profiles of actions y
of

2 2
Example 2 players by games
2 actions I
of player A
payoff player B
when he she plays
Ai or Mr Mm B Action 132

Action Al
TU 05 7 Bp
player
A Action A2
b
in
A B2
va car B2
Caz B U b AZ B2
 An equilibrium of behaviours r expectations
Nash equilibrium
A prediction about what will happen in the
game
profile of actions

given what the other s do in the profile each

player
best responds i e chooses action that maximise their
utility

play Bl
to
If player A expects player B
Best response is to
play action A1
Va CA B2 7 Va As Bi

B expects player A to
If player play A 1
Best response is to action B
Vb
play
CA B1 3 U bl Ai Ba

Taking Kitty genovese game

with 2 neighbours

not call
P
call
P
hash equilibrium z
call X 1 X 1 x 1 x
cater
not X X 1 O O symtetric
nashequilibrium situation
both neighbours are
best responding
Nash equilibrium 3
week
payoff calling not calling are the same
M
p 1 E
Strict dominance
suppose that for any belief of a
player about the actions of
other players one action a leads to a
strictly higherpayoff
than another action b
action a strictly dominates action b

A rational player will never take a strictly dominated action

will always take a'over b

Prisoner's Dilma r strict dominance

e
g students plan to study together
either prepare before meeting watch a new episode ofgameof
thrones benefit to
thefirms
prepare not prepare about
colluding what
35 75 competition
Prepare 60 60
my
Mquilibrian
not prepare 75 35 TO 40T
Infamy
favour not preparing 2higher
to not
prepare
payoff

Both preparing us both not preparing

both preparing Pareto dominates both not preparing
Pareto dominates the hash equilibrium because both

prefer to both prepare than both hotprepare

 Mixed wash equilibrium
odds
Multiple equilibria arise
happy
off different expectations
odds I lead to different
eraser even 1 I behaviours

STEP I focus blue player conjecture that

on the red player
odds with probability p
STEP2 focus on blue player if she is mixing must mean she
isindifferent

equation
ODDS EVEN
1 p 1 I P 1 p TI I p

p t
N B red player chooses her probability of odds to make
the blue player indifferent
Duopoly oligopoly a monopolistic competition
3 2
Duopoly firms competiting
oligopoly multiple firms competiting
monopolistic competition each firm can affect the prices

Imperfect competition
level of competition
number of Competitors

Duopoly oligopoly
caveats bertrand vs Cournot competition
homogeneity of the goods
how much are different goods substitutes
monopolistic competition
fierce competition
differentiated goods non
perfect subrotution
between goods
collusion
Trade
off
want to undercut competitors
incentives to agree to relax competition
competition between firms
Bertrand competition in prices s decide prices
first then let market
determine how manyto produce
Cournot competition in quantities

BERTRAND COMPETITION
two firms compete with one another
bychoosing prices P 2 P2
demand is a 100 P
fixed Mc I to produce I additional unit of good

anamnesis
If P CP
everyone buys from firm 100 P P 1 O
If PLL P everyone buys from firm 2 0 100 Pa P2

hemen
quantity price a marginal 71
11100 8 8 11
Mpi pitta
cost

ther of
units of demand
goods that
willbebought

Nash equilibrium
if I p Pa firm 1 s profit marginal cost it
0 as

Not EQUILIBRIUM as if firmI increased

prices a little greater than that less

than 2 gain a profit

if P Pa I each firm is earning no profit asprice marginal

cost
each firm can do nothing to gain more profit
 fr ng g prof
Price competition is brutal
to marginal costs
firms cut prices all the
way down

To find an equilibrium find a profile of actions such that

given the action of the other noplayer wants to deviate

To rule out an equilibrium find one player who wants todeviat

COURNOT COMPETITION

assume 2 firms I and 2 are competing

each firm i 1,2 chooses how much to produce q i
total quantity produced is q t q a
price is given market demand P Q 9 O
by
marginal lost D
profit for firm i is q i XP o

firm I's best response to q2 of firm 2

total market
demant
suppose firm 2 Chooses a 2

firm I maximise 9 9 X Tx
110
FOC 9 q tq z q 0
Fifteen
condition
Bestresponse function of firm 1
solution q 19
921
as
Firm 2 s best response to q of firm
Suppose that firm I chooses q
firm 2 maximises q2 XP Q q x 9 q 192
Foc 9 q 92 92 0

solution is ga la 9 91

Nash equilibrium
looking for a profile of actions q Az such that

q is a best response to q
g is a best response to q

I should lie in the crossing of the two best response

functions

9
91 Nz
92
Nash equilibrium
45
3
go 92191
3 4.5 q
q q2 3
Price 9 6 3
Strictly positive profits profit 3 3 970
Bertrand fierce competition
firms compete in prices

p me zero profits
Cournot soft competition
firms compete in quantities
s me profits 20
p