game theory Flashcards
what is the prisoners dilemma
a game theory paradox that illustrates how two rational individuals can choose not to cooperate, even when it would be in their best interest to do so
what is a dominant strategy
in reaction to the action of firm a, firm b will choose the same strategy
define nash equilibrium
a strategy that when all players use this strategy, no player can obtain higher profits using a different strategy
can there be multiple nash equilibriums
yes
what are the steps to determining a dominant strategy
1) determine each firms best response to any given strategy of the other firm
2)check whether any pairs of strategies are best responses for both firms
what is a mixed strategy
when a player chooses actions according to the probability it assigns to each action
what is the formula for working out the probability and therefore the outcomes
P(R1) + Po (1-R1)
P = payoff for that action
R1 = a response to the action
Po = the alternate payoff for the action taker should the second mover choose the other action
what are the statutes of a static game
-each competitor only acts once and moves simultaneously
-perfect information about the payoff
-imperfect information about the other firm
do firms choose output level or price
output level
in a static game are firms better off cooperating or not
cooperating in order to raise profits
how is a dynamic game different from a static game
the firms move more than once so they have information about the other firms previous moves
what is an action
a single move that a player makes at a specified time
what is a strategy
a battle plan that specifies the full set of actions that a player will make throughout the game
in what type of game are cartels more likely to appear in
multi-period games
what is signalling
where a firm may lower their quantity to signal for a rival firm to lower theirs in order to make a higher profit
what is a trigger strategy
when a firm breaks a collusion agreement, the other firm will punish it by producing at a higher output to lower the cheating firms profits
what is a sequential dynamic game
where one firm moves before another
what do we assume about a sequential move game
perfect info about the previous moves and the payoff function
what is a subgame perfect nash equilibrium
when a set of strategies is a perfect nash equilibrium in every sub game
how do we find a subgame nash equilibrium from a game tree
backwards induction
are all strategies always subgame nash equilibrium
no
how can a firm stop another firms from entering the market
- exclusion contracts
- limit pricing
what is an exclusion contract
where a firm pays another firm of the owner of the land its on to not let a competitor enter the market
what is blockaded entry
despite not paying the exclusion contract, a competitor does not enter the market as P-F <0
