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GLOBAL ECONOMICS (International Trade)

GLOBAL ECONOMICS (International Trade). Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” Day 18. 卜安吉. Prisoner’s Dilemma. Cooperation is usually analyzed in game theory. Using a Non-zero-sum game. Prisoner’s Dilemma. There are two players And Two Choices

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GLOBAL ECONOMICS (International Trade)

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  1. GLOBAL ECONOMICS(International Trade) Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” Day 18 卜安吉

  2. Prisoner’s Dilemma Cooperation is usually analyzed in game theory Using a Non-zero-sum game International Trade, Day 18

  3. Prisoner’s Dilemma • There are two players • And Two Choices • To either “Cooperate" or to “Defect“ • The “Payoff Matrix” – is name for the set of Choices International Trade, Day 18

  4. Prisoner’s Dilemma • Each player gains when both cooperate • But if only one of the players cooperates • The defector gains more • If both defect, both lose (or gain very little) • However, both do not lose as much as the "cheated" (the cooperator) International Trade, Day 18

  5. Prisoner’s Dilemma Payoff Matrix International Trade, Day 18

  6. Prisoner’s Dilemma The Origin of the Game • A Crime was committed • Two alleged criminals, both say I didn’t do it! • Police (Cops) play “good cop, bad cop” • Offer each a “DEAL” – I have a deal for YOU! • Confess and you get a lesser sentence! International Trade, Day 18

  7. Prisoner’s Dilemma If the Game is Zero Sum then: • Both cooperate then result is 5 • One cooperates: receives +10 • One does not cooperate: receives – 10 • No one cooperated both receive 0! • Therefore, zero sum game! International Trade, Day 18

  8. Krugman’s ExampleClass Quiz on 11/5 Payoff Matrices Airbus Boeing Airbus Boeing International Trade, Day 18

  9. Krugman’s Example Boeing/Airbus Class Quiz • Boeing receives a head start in the first round • Therefore, Boeing will produce 100 • Airbus will not produce (producing would result in a -5) • So Entry into the new market makes no sense for Airbus as Boeing has a head start! International Trade, Day 18

  10. Krugman’s Example Boeing/Airbus Class Quiz • Europe gives Airbus a subsidy of 10 • Therefore, Airbus will produce 110 • Boeing will not produce (producing would result in a -5 • So Entry into the new market makes total sense for Airbus when Europe subsidizes! From Paul Krugman, “Is Free Trade Passe?” Journal of Economic Perspectives (Fall 1987) International Trade, Day 18

  11. Prisoner’s Dilemma Your Group’s Task • Worth 20 points if great, 15 if OK, 10 if not • Copied from anywhere – “-10” • Create a game with the rules • Zero sum or not – See our textbook for another example, real world • YOURS MUST BE REAL WORLD! International Trade, Day 18

  12. Prisoner’s Dilemma Your Group’s Task • Due on Wednesday, November 12 • You may ask me ahead of time if it is good • Originality will be graded positively • I will check the internet! • Do NOT use the example from Boeing/Airbus International Trade, Day 18

  13. Prisoner’s Dilemma Notes • Note that NO COLLUSION is allowed • No repeated games either (short term) • Assume rational decision-makers • That is, in our case, both will defect because (without knowing the other’s choice) defection is best! International Trade, Day 18

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