Oligopoly 2 Flashcards
What is game theory
The study of how people and businesses behave in strategic situations
Who is a part of the game
Players
Strategies
Payoffs (rewards and costs)
Possibly some form of pre-commitment
What are simultaneous games
When players effectively make their decisions at the same time - they don’t know the choices of other players when making decisions
What are sequential games
Players take alternate turns to make their choices
What are one shot games
Only played once - individuals have an incentive to behave selfishly
What are repeated games
Games that are played more than once
What is the prisoners dilemma
Both players assumed to select their own dominant strategies for personal gain. Eventually they reach an equilibrium in which they are both worse off
What does standard game theory assume
Rational agents are looking to maximise their own self-interest
When does game theory become relevant to analysing business decision making
When there are relatively few firms
Key evaluation point for game theory
It can over simplify complex decisions, and when there are more than two rival firms in a market the degree of complexity increases - many firms fall back in heuristics
