Week 6 - Conflict

Question 1

What is Hotellings location model?

Answer 1

2 sellers along a strip of land. Each seller can choose their location on the strip, from 0 to 100. There is 1 customer at each location and each customer will buy from the seller closest to them

Question 2

If seller 1 chooses location x and seller 2 chooses location y, what are the profits of the sellers in the Hotelling location model.

Answer 2

𝜋_1=(𝑥+𝑦)/2
𝜋_2=100−(𝑥+𝑦)/2

Question 3

What is the nash equilibrium in Hotellings location model?

Answer 3

Both sellers are located in the middle and sell to half of the customers

Question 4

What do the BRF look like in hotellings location model?

Answer 4

Both lines either side of the 45 degree line, crossing over at the midpoint

Question 5

What does hotellings location model explain?

Answer 5

1. Similar firms setting up in the same location
2. product differentiation - restaurants and clothing brands targetting the buyer with median taste
   3.

Question 6

True or false: with more than 2 players in the hotelling location model there is no nash equilibrium?

Answer 6

True

Question 7

What is the rent-seeking game?

Answer 7

n players are competing for a prize worth V by making costly investments x1, x2…

Question 8

In the rent seeking game what is the probability of winning the prize?

Answer 8

xi/sum of xj

basically your share of investments compared to everyones

Question 9

In the rent seeking game what are the expected payoffs i.e. profit function?

Answer 9

𝜋_𝑖 = (xi/sum of xj)V - xi

Question 10

What kind of things does the rent seeking game represent?

Answer 10

R&D investments
Teams competing for a prize putting in lots of effort/money
Candidates investing in political campaigns

Question 11

When calculating the BR in the rent-seeking game, what do you have to remember to do?

Answer 11

Express the sum of all investments as your investments + everyone elses

Question 12

After you have the BR in the rent-seeking game, what assumption do you have to make to get the nash equilibria?

Answer 12

Assume in equilibrium, everyone chooses the same investment, so replace, so replace sum of all firms investment with n*x

Question 13

What is the travellers dilemma

Answer 13

Your bag was lost on a flight. The airline wants to reimburse you and asks for the value of the bags. They know you have incentive to inflate the value

You and your friend have to make independent claims about the value of your bag. If you both make the same claims, you will both get that money back. If claims are different, the airline will reimburse the lower amount. The person who made the higher claim will pay a penalty which will go to the other person.

Question 14

What are the best responses in the travellers dilemma?

Answer 14

c1 = c2-1 if c2>real value
c1=c2 if c2 = real value