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AP Economics

AP Economics. Mr. Bernstein Module 65: Game Theory December 13, 2013. AP Economics Mr. Bernstein. Game Theory Study of how interdependent decision makers make choices Used to study the decisions of oligopolists. AP Economics Mr. Bernstein. Non-Cooperative Games Each player competes

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AP Economics

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  1. AP Economics Mr. Bernstein Module 65: Game Theory December 13, 2013

  2. AP EconomicsMr. Bernstein Game Theory • Study of how interdependent decision makers make choices • Used to study the decisions of oligopolists

  3. AP EconomicsMr. Bernstein Non-Cooperative Games • Each player competes to maximize individual payoffs and ignores the effects of his/her action on the payoffs received by the rival

  4. AP EconomicsMr. Bernstein Terms to Know • Payoff Matrix • Diagram showing payoffs to each player in a game depend on the actions of both • Dominant Strategy • Action that is a player’s best action regardless of what the other player does • Nash Equilibrium • Occurs when the game ends, and each player is happy with the outcome, given the choice made by the rival • Neither player can improve their position with another move

  5. AP EconomicsMr. Bernstein The Prisoner’s Dilemma • Criminals don’t know that police lack evidence • Each player has an incentive to choose an action that benefits his/herself at the other player’s expense • Both players are then worse off than if they had acted cooperatively

  6. AP EconomicsMr. Bernstein The Prisoner’s Dilemma, cont. • Confession is the dominant strategy when Johnny and Frankie cannot talk (collude) • Both players confess and the game reaches a Nash equilibrium – but an undesirable outcome!

  7. AP EconomicsMr. Bernstein Repeated Interaction and Tacit Collusion • Repeated Interaction leads to Strategic Behavior • Players take into account the effect of their action on future behavior of competitors • “Tit for tat” strategy • Firm begins by cooperating, then each day does whatever their competitor did yesterday • Tacit Collusion • Competitors collude, without formal agreement, to reduce output and increase prices

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