Flashcards in Micro- Game Theory And Oligopoly Deck (16):

1

## What’s an oligopoly

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interaction among a small number of firms

2

## What’s game theory

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mathematical tool to analyze strategic interaction

3

## What are the two game theory models of oligopoly with homogenous goods

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quantity-setting: Cournot model

price-setting: Bertrand model

4

## What makes a game static

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Players choose their strategies simultaneously (without knowledge of the

others’ choices)

5

## What’s a strictly dominant strategy

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A strategy s is strictly dominant for player i if following s gives strictly higher payoffs than any other available strategies, regardless of what the other players do.

6

## What’s a strictly dominated strategy

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A player has a (strictly) dominated strategy if, for each possible action that his opponents can take, he has another strategy that leads to a payoff that is strictly greater than the payoff associated with the original strategy.

No matter what other people do, this strategy is always beaten by a particular other one

A rational player will never play a dominated strategy

A solution can be find by sequentially removing dominated strategies with each players knowledge that the other player is rational and will not choose a dominated strategy

7

## What’s Nash equilibrium

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A Nash Equilibrium is a profile of strategies such that each player’s strategy is a best response (payoff maximising move taken in response to a set of strategies played by the other players) to the other players’ strategies.

8

## What’s the prisoners dilemma

### The prisoner's dilemma is a standard example of a game analyzed in game theory that shows why two completely rational individuals might not cooperate, even if it appears that it is in their best interests to do so.

9

## What’s the battle of the sexes

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BoS the players agree that it is better to cooperate than not to cooperate, but disagree about the best outcome.

10

## What is a pure strategy

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A pure strategy determines all your moves during the game (and should therefore specify your moves for all possible other players' moves).

11

## What is a mixed strategy

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A mixed strategy is a probability distribution over all possible pure strategies (some of which may get zero weight). After a player has determined a mixed strategy at the beginning of the game, using a randomising device, that player may pick one of those pure strategies and then stick to it.

A mixed strategy of (0,1) is simply a pure strategy of the second option. The numbers in the brackets are between 1 and 0 and represent the probability distribution of choosing the different options.

12

## How to find Nash equilibrium with mixed strategy

### For each player, use the probabilities of the other player choosing each move, and the payoff for the player with each outcome to find an expected utility/payoff for each of the options, and then equate them to get the indifference condition.

13

## Where is Nash equilibrium on graph

### At intersection of two firms’ BR (best response) functions, which are found by differentiating the profit by the quantity each firm controls.

14

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What kind of products are needed for Bertrand price setting model and what does this mean the price coincides with?

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Products are homogeneous (consumers will go to the firm with the lower price) which leads to Bertrand outcome coinciding with competitive outcome.

15

## Main difference between Cournot and Bertrand games.

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Cournot is a non-cooperative quantity-choice game.

Bertrand is a non-cooperative price-setting game.

16