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Game Theory

Module. Micro: Econ:. 29. 65. Game Theory. KRUGMAN'S MICROECONOMICS for AP*. Margaret Ray and David Anderson. What you will learn in this Module :. How oligopoly can be analyzed using game theory. The concept of the prisoners’ dilemma.

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Game Theory

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  1. Module Micro: Econ: 29 65 Game Theory • KRUGMAN'S • MICROECONOMICS for AP* Margaret Ray and David Anderson

  2. What you will learnin thisModule: • How oligopoly can be analyzed using game theory. • The concept of the prisoners’ dilemma. • How repeated interactions among oligopolists can result in collusion in the absence of any formal agreement.

  3. Game Theory • Game Theory: study of how interdependent decision makers make choices.

  4. What should Ford do? Payoff from Super Bowl Advertising

  5. Dominant Strategy Payoff from Super Bowl Advertising

  6. 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.

  7. Nash Equilibrium • Payoff maximizing choice in a non-cooperative game.

  8. Terms to Know • Payoff matrix • Dominant strategy • Nash equilibrium

  9. Prisoner’s Dilemma

  10. Prisoner’s Dilemma • 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. The payoff matrix below summarizes the strategies and outcomes. The payoffs are measured as years in prison, so smaller numbers are preferred.

  11. Repeated Interaction and Tacit Collusion • Repeated interaction can lead to strategic behavior • Tit for tat strategy • Tacit Collusion

  12. Tit for Tat • Maggie prices her gas at $ 4.00 • If Pam also sets her price at $4.00, Maggie keeps her price at $4.00 the next day. • If Pam comes out with a lower $3.00 price, Maggie drops her price to $3.00 the next day. • Maggie continues to follow Pam’s prices until (hopefully) they reach a mutually profit maximizing price.

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