STRATEGIC BEHAVIOR AND GAME THEORY

Strategic behaviour refers to the plan of action or

behaviour of an oligopolist, after taking into
consideration all possible reactions of its
competitors, as they compete for profit or other
advantages.
Since there are only a few frims in the industry, the
action of each affects the others, and the reaction of
the others must be kept in mind by the first in
charting its best course of action.
Game theory is concerned with the choice of the best or
optimal strategy in conflict situations.
Every game theory model includes :
1. Players
Decision-maker (here the manager of oligopolist firms)
whose behaviour we are trying to explain and predict.
2. Strategies
Choice to change prices, develop new product, undertake
a new advertising campaign, build new capacity, and all
other such actions that affect the sales and profitability of
the firm and its rivals
3. Payoffs
The outcome or consequence of each strategy.
 PAYOFF MATRIX FOR AN ADVERTISING GAME

FIRM B

DON’T
ADVERTISE
ADVERTISE

ADVERTISE
(4,3) (5,1)
FIRM A
DON’T
ADVERTISE
(2,5) (3,2)

The Dominant strategy is the optimal choice for player no matter what the
opponent does.

Firm A and Firm B have the dominant strategy.

NASH EQUILIBRIUM
Payoff Matrix for the Advertising Game

FIRM B

DON’T
ADVERTISE
ADVERTISE

ADVERTISE
(4,3) (5,1)
FIRM A
DON’T
ADVERTISE
(2,5) (6,2)

Nash Equilibrium is the situation where each player chooses his or her optimal
strategy, given the strategy chosen by the other player.
THE PRISONERS’ DILEMMA
Negative Payoff Matrix (Year of Detention) for Suspect A and Suspect B

INDIVIDUAL B

CONFESS DON’T CONFESS

CONFESS
(5,5) (0,10)
INDIVIDUAL A
DON’T CONFESS (10,0) (1,1)

Prisoner’ Dilemma is the situation where each player chooses his or her dominant
strategy.
 CASE-1
Payoff Matrix for a Pricing Game
FIRM B

HARGA RENDAH HARGA TINGGI

HARGA RENDAH (1,1)

(3,-1)
FIRM A
HARGA TINGGI (-1,3) (4,2)

From the following payoff matrix, where the payoffs are the profits or losses of two forms,
determine :
a. Whether Firm A has a domiant strategy ?
b. Whether Firm B has a domiant strategy ?
c. The optimal strategy for each firm ?
d. The Nash equilibrium, if there is one.
 CASE-2
Payoff Matrix for a Pricing Game
PERUSAHAAN B

HARGA RENDAH HARGA TINGGI

HARGA RENDAH
(2,2) (4,-2)
PERUSAHAAN A
HARGA TINGGI (-2,4) (5,3)

From the following payoff matrix, where the payoffs are the profits or losses of two forms,
determine :
a. Whether Firm A has a domiant strategy ?
b. Whether Firm B has a domiant strategy ?
c. The optimal strategy for each firm ?
d. The Nash equilibrium, if there is one.