The document discusses key concepts in game theory and its applications. It provides examples of game theory matrices and analyses equilibrium strategies for firms in oligopoly markets. Some key applications covered include pricing competition, advertising competition, cartel cheating, and auctions. Extensions of game theory like repeated games and sequential games are also summarized.
This document explains the Bertrand model of competition using Coca-Cola and Pepsi as an example. The Bertrand model assumes that firms in an oligopoly compete on price rather than quantity. It describes how Joseph Bertrand improved upon the Cournot model by using price rather than quantity as the strategic variable. The model assumes firms produce differentiated products and set prices to maximize profits, resulting in an equilibrium price equal to marginal cost. However, the model makes unrealistic assumptions and may not accurately describe real-world oligopolistic competition between firms like Coke and Pepsi.
Students should be able to:
Use simple game theory to illustrate the interdependence that exists in oligopolistic markets
Understanding the prisoners’ dilemma and a simple two firm/two outcome model. Students should analyse the advantages/disadvantages of being a first mover
Students will not be expected to have an understanding of the Nash Equilibrium
Game theory is a framework for analyzing strategic decision-making situations involving multiple players with potentially conflicting objectives. A game describes interactions between players, including the strategies available to each player and how their payoffs are determined based on the strategies chosen. Equilibrium analysis seeks to identify combinations of strategies such that no player can benefit by unilaterally changing their strategy given what the other players choose.
Classical Theory Of International TradeKRN_KPR2010
The document discusses theories of international trade, including:
1) David Ricardo's theory of comparative advantage, which states that countries should specialize in goods they have a comparative cost advantage in.
2) Absolute and comparative differences in costs as bases for international trade according to Adam Smith and Ricardo respectively.
3) Equal differences in costs not providing a basis for trade between countries with equal production ratios.
Game theory provides a framework for analyzing strategic decision-making between interdependent players. It has become a central tool in industrial economics and managerial decision-making. Key concepts include Nash equilibrium, dominant strategies, backward induction, repeated games, and using penalties/rewards to support collusion. While game theory offers useful insights, its predictive power is limited by complex assumptions and multiple possible equilibria. Real-world applications require considering additional empirical factors not fully captured by theoretical models.
1. Market failure occurs when the conditions for perfect competition are not met, resulting in inefficient resource allocation. Some causes of market failure include monopoly, externalities, public goods, imperfect information, and non-existent markets.
2. Externalities occur when the actions of one economic unit unintentionally impact another in an uncompensated way, such as pollution from factories. This leads to a divergence between private and social costs/benefits.
3. For goods with public goods characteristics of non-rivalry and non-excludability, like national defense, there is no market mechanism to efficiently allocate resources, as they cannot be priced. This results in underprovision of public goods.
This theory relies on the market behaviour of the consumer to know about his preferences with regard to the various combinations for the two reactions and responses of the consumer.
This document explains the Bertrand model of competition using Coca-Cola and Pepsi as an example. The Bertrand model assumes that firms in an oligopoly compete on price rather than quantity. It describes how Joseph Bertrand improved upon the Cournot model by using price rather than quantity as the strategic variable. The model assumes firms produce differentiated products and set prices to maximize profits, resulting in an equilibrium price equal to marginal cost. However, the model makes unrealistic assumptions and may not accurately describe real-world oligopolistic competition between firms like Coke and Pepsi.
Students should be able to:
Use simple game theory to illustrate the interdependence that exists in oligopolistic markets
Understanding the prisoners’ dilemma and a simple two firm/two outcome model. Students should analyse the advantages/disadvantages of being a first mover
Students will not be expected to have an understanding of the Nash Equilibrium
Game theory is a framework for analyzing strategic decision-making situations involving multiple players with potentially conflicting objectives. A game describes interactions between players, including the strategies available to each player and how their payoffs are determined based on the strategies chosen. Equilibrium analysis seeks to identify combinations of strategies such that no player can benefit by unilaterally changing their strategy given what the other players choose.
Classical Theory Of International TradeKRN_KPR2010
The document discusses theories of international trade, including:
1) David Ricardo's theory of comparative advantage, which states that countries should specialize in goods they have a comparative cost advantage in.
2) Absolute and comparative differences in costs as bases for international trade according to Adam Smith and Ricardo respectively.
3) Equal differences in costs not providing a basis for trade between countries with equal production ratios.
Game theory provides a framework for analyzing strategic decision-making between interdependent players. It has become a central tool in industrial economics and managerial decision-making. Key concepts include Nash equilibrium, dominant strategies, backward induction, repeated games, and using penalties/rewards to support collusion. While game theory offers useful insights, its predictive power is limited by complex assumptions and multiple possible equilibria. Real-world applications require considering additional empirical factors not fully captured by theoretical models.
1. Market failure occurs when the conditions for perfect competition are not met, resulting in inefficient resource allocation. Some causes of market failure include monopoly, externalities, public goods, imperfect information, and non-existent markets.
2. Externalities occur when the actions of one economic unit unintentionally impact another in an uncompensated way, such as pollution from factories. This leads to a divergence between private and social costs/benefits.
3. For goods with public goods characteristics of non-rivalry and non-excludability, like national defense, there is no market mechanism to efficiently allocate resources, as they cannot be priced. This results in underprovision of public goods.
This theory relies on the market behaviour of the consumer to know about his preferences with regard to the various combinations for the two reactions and responses of the consumer.
This document provides an overview of game theory, including:
1) Game theory is the study of strategically interdependent decision-making between players in a game. It examines why competitors behave similarly and how players in the Cold War determined nuclear weapon levels.
2) A game has players, strategies, payoffs, and outcomes. It can be finite or infinite, stable or unstable. Players can have complete or incomplete information.
3) Nash equilibrium describes situations where players lack incentive to deviate from their strategy given another player's strategy. The prisoner's dilemma exemplifies this.
This document provides an overview of collusive oligopoly and price leadership models. It defines collusive oligopoly as when oligopolistic firms make joint pricing and output decisions through agreement. Price leadership is described as an informal practice where one firm sets prices that other firms closely follow. Two types of price leadership are discussed: by a low-cost firm, and by a dominant firm that has large market share. The document also explains barometric price leadership, where the most experienced firm assesses market conditions and sets prices others willingly follow.
The document discusses John Nash and his concept of Nash Equilibrium from game theory. It provides definitions of Nash Equilibrium as a set of strategies where each player is doing the best they can given their opponent's choices. This is compared to dominant strategies, where the strategy is the best no matter what the opponent chooses. Cournot Equilibrium is described as a special case of Nash Equilibrium for an oligopoly market. An example is given of a beach location game to illustrate Nash Equilibrium between two competitors.
Patinkin argues that the classical dichotomy between real and monetary sectors is invalid. When the money supply changes, it affects relative prices through the real balance effect. Specifically:
1) If money supply increases, prices rise proportionally. This reduces the real value of cash balances and lowers demand for goods, putting downward pressure on prices.
2) The real balance effect restores equilibrium by linking demand for goods and money - if prices fall, real balances and demand for goods rise, putting upward pressure back on prices.
3) Therefore, changes in the money supply can change the price level without affecting relative prices, reconciling monetary and real factors and invalidating the dichotomy between the two.
This document summarizes the Cournot duopoly model of market competition between two firms. It explains that under Cournot's assumptions, the two firms will each capture 1/3 of the market share and settle at an equilibrium price point between the competitive and monopoly prices. The model involves the firms reacting to each other's output and price decisions in successive rounds until they split the market evenly. Some criticisms of the model are that it assumes costless production and does not allow for new firm entry or learning over time.
A brief introduction to game theory prisoners dilemma and nash equilibrumpravesh kumar
Game theory is the study of strategic decision making between players. A game has players, strategies or actions for each player, and payoffs for outcomes. The Prisoner's Dilemma is a classic game where two prisoners must choose to confess or deny a crime without communicating. If both deny, they get a short sentence, but each has an incentive to confess regardless of the other's action for a lesser sentence. Nash equilibrium is where each player's strategy is the best response to the other players' strategies.
Meeting 4 - Stolper - Samuelson theorem (International Economics)Albina Gaisina
The document discusses the Stolper-Samuelson theorem, which states that a decrease in the price of a good will lead to a decrease in the return to the factor that is used intensively in the production of that good. It will conversely lead to an increase in the return to the other factor. The theorem is based on assumptions of perfect competition and factor mobility. It predicts that increased trade with developing countries likely contributed to rising wage inequality in skilled countries. While trade increases overall welfare, it benefits some factors more than others according to their intensity of use.
This document provides an overview of game theory concepts. It defines game theory as analyzing situations of conflict and competition involving decision making by two or more participants. Some key points:
- Game theory was developed in the 20th century, with a seminal 1944 book discussing its application to business strategy.
- Basic concepts include players, pure and mixed strategies, zero-sum vs. non-zero-sum games, and payoff matrices to represent outcomes.
- Solutions include finding equilibrium points using minimax and maximin principles for pure strategies or solving systems of equations for mixed strategies when no equilibrium exists.
- Dominance rules can reduce game matrices, and graphical or algebraic methods solve for mixed strategies without saddles
Consumer Behavior: Income and Substitution Effects
The Consumer’s Reaction to a Change in Income
Engel Curve or Engel’s Law
The Consumer’s Reaction to a Change in Price
The Consumer’s Demand Function
Cobb-Douglas Utility Function
The Slutsky Substitution Effect
The Hicks substitution effect
A producer's equilibrium refers to the level of output where the producer earns maximum profits. This occurs where marginal revenue equals marginal cost and marginal cost is rising. There are two approaches to determining producer's equilibrium - the total revenue and total cost approach, and the marginal revenue and marginal cost approach. Under both approaches, equilibrium is reached at the quantity of output where marginal revenue equals marginal cost and marginal cost is rising. This equilibrium can be illustrated using diagrams with output on the x-axis and costs/revenues on the y-axis.
The presentation discusses a firm's expansion path. An expansion path shows the optimal input combinations as production scale increases while input prices remain constant. It connects the least costly methods of producing different output levels. The expansion path may not be a straight line or always upward sloping. The document includes a diagram of a sample firm's expansion path, labeled with optimal input combinations at different output levels. It explains that the points on the expansion path occur where the isoquant and iso-cost lines are tangent, meaning the marginal rate of technical substitution equals the slope of the iso-cost line. In conclusion, the expansion path identifies the least cost input combinations for each output level.
1. The document discusses general equilibrium theory (GET) and defines general equilibrium as a state where all markets and decision-making units are in simultaneous equilibrium.
2. It presents a simple two-sector general equilibrium model of an economy with two consumers, two goods, and two factors of production. Equations represent consumer demand, factor supply, factor demand, good supply, and market clearing for goods and factors.
3. With the number of equations equal to the number of unknowns, a general equilibrium solution exists in this Walrasian model under certain assumptions. GET provides a framework for understanding the complexity of economic systems through interdependent markets.
The document discusses general equilibrium theory and its key assumptions and implications. It addresses the following points in 3 sentences:
General equilibrium theory posits that all markets, including both product and factor markets, will reach equilibrium simultaneously. This equilibrium will be Pareto optimal, meaning no individual can be made better off without making another worse off due to optimal resource allocation. The model assumes perfect competition, constant returns to scale, and that equilibrium is determined by price adjustments across interconnected markets.
AS How markets and prices allocate resourcesOliver Pratten
This document discusses how markets allocate resources through the interaction of economic agents and prices. It identifies the three main economic agents as consumers, producers, and owners of factors of production. Consumers aim to consume as much as possible for the lowest cost, producers aim to maximize profits, and owners of factors aim to sell their resources to the highest bidder. Adam Smith argued that if each agent acts in their own self-interest, the invisible hand of the market will ensure resources are allocated to producing goods and services that are most valued. Prices ration scarce resources, provide incentives to producers, and signal information to all agents.
Game theory was founded by John von Neumann and introduced in his 1944 book with Oskar Morgenstern. It is used to model strategic decision-making where individuals' success depends on the actions of others. Key concepts include the prisoner's dilemma, which illustrates choices with conflicting incentives. Game theory has applications in economics, business, biology, political science, and other fields to help decision-makers navigate strategic environments. It provides a mathematical framework to represent interactions and predict outcomes of interdependent decisions made by rational players.
Oligopoly Competition Pricing, and Different Models Mithilesh Trivedi
This document discusses pricing strategies in oligopolistic markets. It begins by defining key terms like oligopoly and barriers to entry. It then discusses three main models of oligopoly pricing:
1) Cooperative vs non-cooperative behavior, where firms must decide whether to set prices jointly or compete separately.
2) Game theory, which models pricing as a strategic interaction where each firm's best decision depends on the other's actions.
3) Specific models like Cournot competition, where firms choose quantities, and the kinked demand curve model of price leadership.
Real-world examples of oligopolies discussed include airlines and car manufacturers. The document analyzes how various factors influence pricing under imperfect
This document provides an overview of game theory. It defines game theory as the study of how people interact and make decisions strategically, taking into account that each person's actions impact others. It discusses the history and key concepts of game theory, including players, strategies, payoffs, assumptions of rationality and perfect information. It provides examples of zero-sum and non-zero-sum games like the Prisoner's Dilemma. The document is intended to introduce game theory and its basic elements.
1. The document discusses general equilibrium and welfare in a perfectly competitive economy with two goods, x and y. It uses an Edgeworth box diagram to show the production possibility frontier for efficient combinations of x and y output given fixed inputs.
2. The production possibility frontier and indifference curves are used to determine the equilibrium prices and outputs of x and y that equalize supply and demand. A change such as technological progress in x production would shift the frontier outward and lower the relative price of x.
3. The debate over Britain's Corn Laws in the 1800s is used as an example, where removing trade tariffs on grain imports would change the price ratio and increase grain imports.
This document summarizes Sylos-Labini's model of limit pricing in oligopoly markets. The key points are:
1) The model assumes a price leader firm that allows smaller firms to earn normal profits by setting the price between the large firm's lower costs and the small firm's higher costs.
2) If new firms enter, supply increases and price falls to the small firm's cost level, earning only normal profits and preventing further entry.
3) The existing firms then raise price back to the limit level to earn abnormal profits again and deter future entry. The limit pricing strategy deters competition from new entrants.
Models of Oligopoly
Cournot’s duopoly model
Sweezy’s kinked demand curve model
Price leadership models
Collusive models :The Cartel Arrangement
The Game Theory
Prisoner’s Dilemma
Price leadership Model
Collusive models The Cartel Arrangement
This document provides an outline for game theory. It introduces two-player zero-sum games and discusses finding optimal solutions through the minimax-maximin criterion. Pure and mixed strategy solutions are covered. Graphical and algebraic methods are summarized as ways to solve games, with examples provided. Dominance properties are also explained as a way to reduce game matrices.
This document provides an overview of game theory, which was developed in 1928 to analyze competitive situations. It describes various types of games, such as zero-sum, non-zero-sum, pure-strategy, and mixed-strategy games. Methods for solving different types of games are presented, including the saddle point method for 2x2 games, dominance method, graphical method, and algebraic method. Limitations of game theory in assuming perfect information and rational behavior are also noted.
This document provides an overview of game theory, including:
1) Game theory is the study of strategically interdependent decision-making between players in a game. It examines why competitors behave similarly and how players in the Cold War determined nuclear weapon levels.
2) A game has players, strategies, payoffs, and outcomes. It can be finite or infinite, stable or unstable. Players can have complete or incomplete information.
3) Nash equilibrium describes situations where players lack incentive to deviate from their strategy given another player's strategy. The prisoner's dilemma exemplifies this.
This document provides an overview of collusive oligopoly and price leadership models. It defines collusive oligopoly as when oligopolistic firms make joint pricing and output decisions through agreement. Price leadership is described as an informal practice where one firm sets prices that other firms closely follow. Two types of price leadership are discussed: by a low-cost firm, and by a dominant firm that has large market share. The document also explains barometric price leadership, where the most experienced firm assesses market conditions and sets prices others willingly follow.
The document discusses John Nash and his concept of Nash Equilibrium from game theory. It provides definitions of Nash Equilibrium as a set of strategies where each player is doing the best they can given their opponent's choices. This is compared to dominant strategies, where the strategy is the best no matter what the opponent chooses. Cournot Equilibrium is described as a special case of Nash Equilibrium for an oligopoly market. An example is given of a beach location game to illustrate Nash Equilibrium between two competitors.
Patinkin argues that the classical dichotomy between real and monetary sectors is invalid. When the money supply changes, it affects relative prices through the real balance effect. Specifically:
1) If money supply increases, prices rise proportionally. This reduces the real value of cash balances and lowers demand for goods, putting downward pressure on prices.
2) The real balance effect restores equilibrium by linking demand for goods and money - if prices fall, real balances and demand for goods rise, putting upward pressure back on prices.
3) Therefore, changes in the money supply can change the price level without affecting relative prices, reconciling monetary and real factors and invalidating the dichotomy between the two.
This document summarizes the Cournot duopoly model of market competition between two firms. It explains that under Cournot's assumptions, the two firms will each capture 1/3 of the market share and settle at an equilibrium price point between the competitive and monopoly prices. The model involves the firms reacting to each other's output and price decisions in successive rounds until they split the market evenly. Some criticisms of the model are that it assumes costless production and does not allow for new firm entry or learning over time.
A brief introduction to game theory prisoners dilemma and nash equilibrumpravesh kumar
Game theory is the study of strategic decision making between players. A game has players, strategies or actions for each player, and payoffs for outcomes. The Prisoner's Dilemma is a classic game where two prisoners must choose to confess or deny a crime without communicating. If both deny, they get a short sentence, but each has an incentive to confess regardless of the other's action for a lesser sentence. Nash equilibrium is where each player's strategy is the best response to the other players' strategies.
Meeting 4 - Stolper - Samuelson theorem (International Economics)Albina Gaisina
The document discusses the Stolper-Samuelson theorem, which states that a decrease in the price of a good will lead to a decrease in the return to the factor that is used intensively in the production of that good. It will conversely lead to an increase in the return to the other factor. The theorem is based on assumptions of perfect competition and factor mobility. It predicts that increased trade with developing countries likely contributed to rising wage inequality in skilled countries. While trade increases overall welfare, it benefits some factors more than others according to their intensity of use.
This document provides an overview of game theory concepts. It defines game theory as analyzing situations of conflict and competition involving decision making by two or more participants. Some key points:
- Game theory was developed in the 20th century, with a seminal 1944 book discussing its application to business strategy.
- Basic concepts include players, pure and mixed strategies, zero-sum vs. non-zero-sum games, and payoff matrices to represent outcomes.
- Solutions include finding equilibrium points using minimax and maximin principles for pure strategies or solving systems of equations for mixed strategies when no equilibrium exists.
- Dominance rules can reduce game matrices, and graphical or algebraic methods solve for mixed strategies without saddles
Consumer Behavior: Income and Substitution Effects
The Consumer’s Reaction to a Change in Income
Engel Curve or Engel’s Law
The Consumer’s Reaction to a Change in Price
The Consumer’s Demand Function
Cobb-Douglas Utility Function
The Slutsky Substitution Effect
The Hicks substitution effect
A producer's equilibrium refers to the level of output where the producer earns maximum profits. This occurs where marginal revenue equals marginal cost and marginal cost is rising. There are two approaches to determining producer's equilibrium - the total revenue and total cost approach, and the marginal revenue and marginal cost approach. Under both approaches, equilibrium is reached at the quantity of output where marginal revenue equals marginal cost and marginal cost is rising. This equilibrium can be illustrated using diagrams with output on the x-axis and costs/revenues on the y-axis.
The presentation discusses a firm's expansion path. An expansion path shows the optimal input combinations as production scale increases while input prices remain constant. It connects the least costly methods of producing different output levels. The expansion path may not be a straight line or always upward sloping. The document includes a diagram of a sample firm's expansion path, labeled with optimal input combinations at different output levels. It explains that the points on the expansion path occur where the isoquant and iso-cost lines are tangent, meaning the marginal rate of technical substitution equals the slope of the iso-cost line. In conclusion, the expansion path identifies the least cost input combinations for each output level.
1. The document discusses general equilibrium theory (GET) and defines general equilibrium as a state where all markets and decision-making units are in simultaneous equilibrium.
2. It presents a simple two-sector general equilibrium model of an economy with two consumers, two goods, and two factors of production. Equations represent consumer demand, factor supply, factor demand, good supply, and market clearing for goods and factors.
3. With the number of equations equal to the number of unknowns, a general equilibrium solution exists in this Walrasian model under certain assumptions. GET provides a framework for understanding the complexity of economic systems through interdependent markets.
The document discusses general equilibrium theory and its key assumptions and implications. It addresses the following points in 3 sentences:
General equilibrium theory posits that all markets, including both product and factor markets, will reach equilibrium simultaneously. This equilibrium will be Pareto optimal, meaning no individual can be made better off without making another worse off due to optimal resource allocation. The model assumes perfect competition, constant returns to scale, and that equilibrium is determined by price adjustments across interconnected markets.
AS How markets and prices allocate resourcesOliver Pratten
This document discusses how markets allocate resources through the interaction of economic agents and prices. It identifies the three main economic agents as consumers, producers, and owners of factors of production. Consumers aim to consume as much as possible for the lowest cost, producers aim to maximize profits, and owners of factors aim to sell their resources to the highest bidder. Adam Smith argued that if each agent acts in their own self-interest, the invisible hand of the market will ensure resources are allocated to producing goods and services that are most valued. Prices ration scarce resources, provide incentives to producers, and signal information to all agents.
Game theory was founded by John von Neumann and introduced in his 1944 book with Oskar Morgenstern. It is used to model strategic decision-making where individuals' success depends on the actions of others. Key concepts include the prisoner's dilemma, which illustrates choices with conflicting incentives. Game theory has applications in economics, business, biology, political science, and other fields to help decision-makers navigate strategic environments. It provides a mathematical framework to represent interactions and predict outcomes of interdependent decisions made by rational players.
Oligopoly Competition Pricing, and Different Models Mithilesh Trivedi
This document discusses pricing strategies in oligopolistic markets. It begins by defining key terms like oligopoly and barriers to entry. It then discusses three main models of oligopoly pricing:
1) Cooperative vs non-cooperative behavior, where firms must decide whether to set prices jointly or compete separately.
2) Game theory, which models pricing as a strategic interaction where each firm's best decision depends on the other's actions.
3) Specific models like Cournot competition, where firms choose quantities, and the kinked demand curve model of price leadership.
Real-world examples of oligopolies discussed include airlines and car manufacturers. The document analyzes how various factors influence pricing under imperfect
This document provides an overview of game theory. It defines game theory as the study of how people interact and make decisions strategically, taking into account that each person's actions impact others. It discusses the history and key concepts of game theory, including players, strategies, payoffs, assumptions of rationality and perfect information. It provides examples of zero-sum and non-zero-sum games like the Prisoner's Dilemma. The document is intended to introduce game theory and its basic elements.
1. The document discusses general equilibrium and welfare in a perfectly competitive economy with two goods, x and y. It uses an Edgeworth box diagram to show the production possibility frontier for efficient combinations of x and y output given fixed inputs.
2. The production possibility frontier and indifference curves are used to determine the equilibrium prices and outputs of x and y that equalize supply and demand. A change such as technological progress in x production would shift the frontier outward and lower the relative price of x.
3. The debate over Britain's Corn Laws in the 1800s is used as an example, where removing trade tariffs on grain imports would change the price ratio and increase grain imports.
This document summarizes Sylos-Labini's model of limit pricing in oligopoly markets. The key points are:
1) The model assumes a price leader firm that allows smaller firms to earn normal profits by setting the price between the large firm's lower costs and the small firm's higher costs.
2) If new firms enter, supply increases and price falls to the small firm's cost level, earning only normal profits and preventing further entry.
3) The existing firms then raise price back to the limit level to earn abnormal profits again and deter future entry. The limit pricing strategy deters competition from new entrants.
Models of Oligopoly
Cournot’s duopoly model
Sweezy’s kinked demand curve model
Price leadership models
Collusive models :The Cartel Arrangement
The Game Theory
Prisoner’s Dilemma
Price leadership Model
Collusive models The Cartel Arrangement
This document provides an outline for game theory. It introduces two-player zero-sum games and discusses finding optimal solutions through the minimax-maximin criterion. Pure and mixed strategy solutions are covered. Graphical and algebraic methods are summarized as ways to solve games, with examples provided. Dominance properties are also explained as a way to reduce game matrices.
This document provides an overview of game theory, which was developed in 1928 to analyze competitive situations. It describes various types of games, such as zero-sum, non-zero-sum, pure-strategy, and mixed-strategy games. Methods for solving different types of games are presented, including the saddle point method for 2x2 games, dominance method, graphical method, and algebraic method. Limitations of game theory in assuming perfect information and rational behavior are also noted.
This document provides an overview of game theory concepts including its assumptions, classifications, elements, significance, and limitations. It also describes methods for solving different types of games such as the prisoner's dilemma, 2-person zero-sum games, and pure strategy games. Game theory analyzes strategic decision making among interdependent parties and can provide insights into situations involving conflict or competition between rational opponents.
Game theory is a branch of applied mathematics that analyzes strategic interactions between agents. It includes concepts like Nash equilibrium, mixed strategies, and coordination games. Game theory is used in economics, political science, biology, and other social sciences to model how individuals make decisions in strategic situations where outcomes depend on the decisions of others.
This document provides an overview of game theory concepts taught in a university course. It defines game theory as the mathematics of human interactions and decision making. Key concepts discussed include Nash equilibrium, where each player adopts the optimal strategy given other players' strategies. Examples of applications are given in fields like economics, politics and biology. Different types of games and solutions concepts like mixed strategies are also introduced.
This document provides an overview of game theory and two-person zero-sum games. It defines key concepts such as players, strategies, payoffs, and classifications of games. It also describes the assumptions and solutions for pure strategy and mixed strategy games. Pure strategy games have a saddle point solution found using minimax and maximin rules. Mixed strategy games do not have a saddle point and require determining the optimal probabilities that players select each strategy.
This presentation is an attempt to introduce Game Theory in one session. It's suitable for undergraduates. In practice, it's best used as a taster since only a portion of the material can be covered in an hour - topics can be chosen according to the interests of the class.
The main reference source used was 'Games, Theory and Applications' by L.C.Thomas. Further notes available at: http://bit.ly/nW6ULD
This Presentation is For Students of Class 10th CBSE Board. This Presentation is on Natural Resources. The Main Topics of this Presentation Are Renewable and Non Renewable Source, Solar Energy, Wind, Forests and Fuel.
Natural resources occur naturally and include materials like rocks, minerals, soil, rivers, and plants and animals. They satisfy human needs and can be used to create value. Humans are also a resource because through developing skills, they can develop other resources by adding value to physical materials. Any material from the earth that is used by living things and satisfies human needs is considered a natural resource. Resources can be biotic, like forests and animals, or abiotic, like air and water. Some resources are renewable, like sunlight, while others are non-renewable.
- Game theory is a technique used to analyze strategic interactions between players where individuals or organizations have conflicting objectives.
- Players are decision makers, strategies are courses of action, and payoffs are the outcomes of strategies. Players aim to optimize their strategies.
- Types of games include constant-sum, zero-sum, positive-sum, and negative-sum games. Cooperative games involve coordinated player strategies.
- Interdependence is key to games, which can be sequential or simultaneous. Simultaneous games are solved using Nash equilibrium concepts.
- The prisoner's dilemma and advertising games are examples used to illustrate game theory concepts like dominant strategies and Nash equilibria.
This document discusses game theory concepts including dominant strategies, Nash equilibrium, prisoner's dilemma, and repeated games. It provides examples of how companies could use game theory to determine pricing strategies. In a prisoner's dilemma scenario where two suspects can confess or not confess, confessing dominantly dominates as the strategy. However, in repeated games firms can adopt a cooperative "tit for tat" strategy and set high prices to maximize joint profits in a Nash equilibrium.
This document discusses key concepts in game theory and provides examples of how game theory can be applied to economics. It covers topics like the prisoner's dilemma, pricing games between firms, and evaluating factors like first mover advantage. Examples are given around oil markets, price wars, and advertising spending. Limitations of game theory are noted, such as its tendency to oversimplify complex business decisions.
1) Nature represents random events outside of players' control that affect payoffs.
2) In sequential games, nature moves first and players respond optimally to nature's moves.
3) In simultaneous games, players maximize expected payoffs based on the probabilities of nature's moves since the actual move is unknown when choosing a strategy.
This document provides an overview of topics in game theory and competitive strategy that will be discussed in Chapter 13, including gaming and strategic decisions, dominant strategies, the Nash equilibrium, repeated games, sequential games, threats and commitments, entry deterrence, bargaining strategy, and auctions. It presents examples and concepts such as noncooperative vs cooperative games, the prisoner's dilemma, mixed strategies, and analyses of specific market situations involving pricing, location choice, and oligopolistic cooperation.
game theory dan strategy competitive.pptxIqbal Daulay
This document discusses game theory and competitive strategy. It covers game theory basics like types of games and Nash equilibrium. It also discusses prisoner's dilemma, infinitely and finitely repeated games, and applications like auctions. Finally, it discusses competitive strategy, including limit pricing, non-price competition, and optimal advertising levels. The key topics are how game theory helps with decision making accounting for others' actions and how firms use pricing and non-pricing strategies to gain competitive advantages.
This document provides an overview of game theory concepts including repeated games, sequential games, and signaling games. It discusses how these concepts can be applied to scenarios like price wars between Coke and Pepsi (repeated games) and entry deterrence games between incumbents and potential competitors (sequential games). It also provides an example of how business school can act as a credible signal in a labor market signaling game.
Everyone heard of the Art of War military classic written by Sun Tzu. Unknown to many, Sun Bin, the grandson of Sun Tzu, wrote a more powerful book called Secret Art of War. Over 1,500 years it evolved into The 36 Stratagems or 三十六计
The document discusses several applications of game theory including the dominant firm game, Nash equilibrium, prisoner's dilemma, and a terrorism scenario. It analyzes strategic situations involving two or more players where the success of each player depends on the choices of others. Key concepts explained are dominant strategies, Nash equilibria, and how game theory can model real-world competitive interactions and predict outcomes even when players cannot communicate.
The document discusses dominant strategy and Nash equilibrium in game theory. A dominant strategy is one where a player will choose the same strategy regardless of what the other player chooses, as it provides the best outcome. A Nash equilibrium occurs when no player can benefit by changing their strategy given the other player's strategy. The Prisoner's Dilemma game has a dominant strategy equilibrium of both players confessing. It also has a single Nash equilibrium of both confessing. The Advertising game has two Nash equilibria but no dominant strategies, as the best strategy depends on the other player's choice.
This document provides an overview of game theory concepts and applications. It discusses why game theory is useful for analyzing strategic interactions between rational decision-makers. Examples are given of games that individuals and businesses play, such as coordination games, prisoner's dilemmas, mixed strategies, repeated games, and more. The document also summarizes a case involving Toys "R" Us restricting toy manufacturers from selling to warehouse clubs to prevent further growth of those competitors. It prompts the reader to consider what actions they would take in that situation and how to properly define the strategic game being played.
Here are payoff matrices for some of the game theory scenarios:
Student helping partner:
Partner studies Partner doesn't study
Student helps Partner gets A, Student gets B Partner gets F, Student gets C
Student doesn't help Partner gets C, Student gets D Partner gets F, Student gets D
A's owner moving team:
Oakland builds stadium Oakland doesn't build stadium
Owner moves team Loss of fans and money, profit of $500m Profit of $1b
Owner stays Loss of $200m, fans stay Loss of $500m
Coke advertising:
Coke advertises Coke doesn't advertise
Pepsi advertises Profit of $1b each Profit of
Game theory is a mathematical approach that analyzes strategic interactions between parties. It is used to understand situations where decision-makers are impacted by others' choices. A game has players, strategies, payoffs, and information. The Nash equilibrium predicts outcomes as the strategies where no player benefits by changing alone given others' choices. For example, in the Prisoner's Dilemma game about two suspects, confessing dominates remaining silent no matter what the other does, leading both to confess for a worse joint outcome than remaining silent.
This document provides an overview of decision theory and various decision-making environments. It discusses the six steps in decision theory as applying to a case study about a lumber company expanding its product line. The types of decision-making environments covered are decisions under certainty, risk, and uncertainty. Decision-making under uncertainty further explores criteria for decisions like maximax, maximin, weighted average, equally likely, and minimax regret. Game theory and its applications to strategic decision-making between competitors are also briefly introduced.
Only one player can win the game of Monopoly by bankrupting all other players. The document discusses different types of monopolies, including geographic monopolies that control supply in a certain area due to location barriers, government-sanctioned monopolies of public utilities, and technological monopolies enabled by patents and copyrights. It also discusses how economists are concerned about monopolies due to the ability of monopolists to raise prices without competition.
The document provides an introduction to game theory and its applications in business. It begins with an opening experiment to demonstrate game theory concepts. It then discusses how actual human behavior in experiments does not always match the theoretical predictions of rational behavior in game theory. The document outlines key elements of games, provides examples of where game theory is applied, and discusses some classic games like the Prisoner's Dilemma and how changing the structural rules of a game can influence outcomes.
Game Theory and Competitive Strategy / abshor.marantika / Devandra Nabila Aul...bbyjello
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Chapter 6 - Strategic decision in business.pdfMaiSng14
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Game theory lecture full ch13_ingles.pptjguzmancox
This document provides an outline and sections from a chapter on game theory and competitive strategy. It discusses key concepts in game theory like games, strategies, payoffs, Nash equilibriums, repeated games, sequential games, threats and commitments. Specific examples are provided to illustrate dominant strategies, Nash equilibriums, the prisoners' dilemma, repeated games in industries, and how the order of moves provides advantages in sequential games.
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Suzanne Spiteri’s recent report on improving the quality and accessibility of job postings to reduce employment barriers for neurodivergent people.
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Solution Manual For Financial Accounting, 8th Canadian Edition 2024, by Libby...Donc Test
Solution Manual For Financial Accounting, 8th Canadian Edition 2024, by Libby, Hodge, Verified Chapters 1 - 13, Complete Newest Version Solution Manual For Financial Accounting, 8th Canadian Edition by Libby, Hodge, Verified Chapters 1 - 13, Complete Newest Version Solution Manual For Financial Accounting 8th Canadian Edition Pdf Chapters Download Stuvia Solution Manual For Financial Accounting 8th Canadian Edition Ebook Download Stuvia Solution Manual For Financial Accounting 8th Canadian Edition Pdf Solution Manual For Financial Accounting 8th Canadian Edition Pdf Download Stuvia Financial Accounting 8th Canadian Edition Pdf Chapters Download Stuvia Financial Accounting 8th Canadian Edition Ebook Download Stuvia Financial Accounting 8th Canadian Edition Pdf Financial Accounting 8th Canadian Edition Pdf Download Stuvia
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1. Elemental Economics - Introduction to mining.pdfNeal Brewster
After this first you should: Understand the nature of mining; have an awareness of the industry’s boundaries, corporate structure and size; appreciation the complex motivations and objectives of the industries’ various participants; know how mineral reserves are defined and estimated, and how they evolve over time.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
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2. Game Theory
• Optimization has two shortcomings when applied to
actual business situations
– Assumes factors such as reaction of competitors or
tastes and preferences of consumers remain
constant.
– Managers sometimes make decisions when other
parties have more information about market
conditions.
• Game theory is concerned with “how individuals make
decisions when they are aware that their actions affect
each other and when each individual takes this into
account.”
• Types of games
– Zero-Sum or Non-Zero-Sum
– Cooperative or Non-Cooperative
– Two-Person or N-Person
• All solutions involve an equilibrium condition.
3. Strategic Behavior
• Game Theory includes:
– Players(decision makers/managers)
– Strategies(choices to change price, develop new
product,undertake new advt. campaign,build new
capacity etc which affect the sales and profit of
rivals)
– Payoff matrix(outcome or consequence in terms of
profit/loss)
• Nash Equilibrium
– Each player chooses a strategy that is optimal
given the strategy of the other player
– A strategy is dominant if it is always optimal
4. Prisoners’ Dilemma
Two suspects are arrested for armed robbery. They are
immediately separated. If convicted, they will get a term
of 10 years in prison. However, the evidence is not
sufficient to convict them of more than the crime of
possessing stolen goods, which carries a sentence of
only 1 year.
The suspects are told the following: If you confess and
your accomplice does not, you will go free. If you do not
confess and your accomplice does, you will get 10
years in prison. If you both confess, you will both get 5
years in prison.
6. Prisoners’ Dilemma
Confess Don't Confess
Confess (5, 5) (0, 10)
Don't Confess (10, 0) (1, 1)
Individual B
Individual A
Dominant Strategy
Both Individuals Confess
(Nash Equilibrium)
7. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
Advertising Example
8. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
Firm B chooses to advertise – options for Firm A?
9. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
What is the optimal strategy for Firm A if Firm B chooses
to advertise?
If Firm A chooses to advertise, the payoff is 4. Otherwise,
the payoff is 2. The optimal strategy is to advertise.
10. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
Firm B chooses not to advertise – options for Firm A?
11. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
What is the optimal strategy for Firm A if Firm B chooses
not to advertise?
If Firm A chooses to advertise, the payoff is 5. Otherwise,
the payoff is 3. Again, the optimal strategy is to advertise.
12. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
Regardless of what Firm B decides to do, the optimal
strategy for Firm A is to advertise. The dominant strategy
for Firm A is to advertise.
13. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
Firm A chooses to advertise – options for Firm B?
14. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
What is the optimal strategy for Firm B if Firm A chooses
to advertise?
If Firm B chooses to advertise, the payoff is 3. Otherwise,
the payoff is 1. The optimal strategy is to advertise.
15. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
Firm A chooses not to advertise – options for firm B?
16. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
What is the optimal strategy for Firm B if Firm A chooses
not to advertise?
If Firm B chooses to advertise, the payoff is 5. Otherwise,
the payoff is 2. Again, the optimal strategy is to advertise.
17. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
Regardless of what Firm A decides to do, the optimal
strategy for Firm B is to advertise. The dominant strategy
for Firm B is to advertise.
18. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
The dominant strategy for Firm A is to advertise and the
dominant strategy for Firm B is to advertise. The Nash
equilibrium is for both firms to advertise.
20. Game Theory
What is the optimal strategy for Firm A if Firm B chooses
to advertise?
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (6, 2)
Firm B
Firm A
21. Game Theory
What is the optimal strategy for Firm A if Firm B chooses
to advertise?
If Firm A chooses to advertise, the payoff is 4. Otherwise,
the payoff is 2. The optimal strategy is to advertise.
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (6, 2)
Firm B
Firm A
22. Game Theory
What is the optimal strategy for Firm A if Firm B chooses
not to advertise?
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (6, 2)
Firm B
Firm A
23. Game Theory
What is the optimal strategy for Firm A if Firm B chooses
not to advertise?
If Firm A chooses to advertise, the payoff is 5. Otherwise,
the payoff is 6. In this case, the optimal strategy is not to
advertise.
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (6, 2)
Firm B
Firm A
24. Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (6, 2)
Firm B
Firm A
Game Theory
The optimal strategy for Firm A depends on which strategy
is chosen by Firms B. Firm A does not have a dominant
strategy.
25. Game Theory
What is the optimal strategy for Firm B if Firm A chooses
to advertise?
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (6, 2)
Firm B
Firm A
26. Game Theory
What is the optimal strategy for Firm B if Firm A chooses
to advertise?
If Firm B chooses to advertise, the payoff is 3. Otherwise,
the payoff is 1. The optimal strategy is to advertise.
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (6, 2)
Firm B
Firm A
27. Game Theory
What is the optimal strategy for Firm B if Firm A chooses
not to advertise?
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (6, 2)
Firm B
Firm A
28. Game Theory
What is the optimal strategy for Firm B if Firm A chooses
not to advertise?
If Firm B chooses to advertise, the payoff is 5. Otherwise,
the payoff is 2. Again, the optimal strategy is to advertise.
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (6, 2)
Firm B
Firm A
29. Game Theory
Regardless of what Firm A decides to do, the optimal
strategy for Firm B is to advertise. The dominant strategy
for Firm B is to advertise.
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (6, 2)
Firm B
Firm A
30. Game Theory
Advertise Don't Advertise
Advertise (4, 3) (5, 1)
Don't Advertise (2, 5) (3, 2)
Firm B
Firm A
The dominant strategy for Firm B is to advertise. If Firm B
chooses to advertise, then the optimal strategy for Firm A
is to advertise. The Nash equilibrium is for both firms to
advertise.
31. Low Price High Price
Low Price (2, 2) (5, 1)
High Price (1, 5) (3, 3)
Firm B
Firm A
Prisoners’ Dilemma
Application: Price Competition
32. Low Price High Price
Low Price (2, 2) (5, 1)
High Price (1, 5) (3, 3)
Firm B
Firm A
Prisoners’ Dilemma
Application: Price Competition
Dominant Strategy: Low Price
37. Games of Particular
Relevance in Economics
• Beach Kiosk Game
– Two-Person, Zero-Sum, Non-cooperative
– Example: two companies provide snacks and
sunscreen on a beach.
• Beachgoers spread themselves out evenly along
the beach.
• Both companies ultimately locate at the midpoint of
the beach, otherwise the other company has an
advantage (closer to more beachgoers)
• Real life example: location of gas stations
38. Games of Particular
Relevance in Economics
• Repeated Game: game is played
repeatedly over a period of time.
• In a repeated game, equilibria that are
not stable may become stable due to the
threat of retaliation.
39. Games of Particular
Relevance in Economics
• Repeated Game: game is played many times, and
equilibria that are not stable may become stable due to
the threat of retaliation.
• Assume (High, High) equilibrium reached and both firms
start off charging the high price.
• In the next period, if one firm cheats (charges low price),
it receives 600 in that period.
• Other firm will change to low prices in the next period to
“retaliate” and both will end up at (Low, Low) equilibrium.
• Thus, incentive exists not to “cheat” in a repeated game
and (High, High) is a viable equilibrium, though it is not in
a single-period game.
• If number of periods are fixed, both firms will have
incentive to cheat (charge low price) in the last period
40. Games of Particular
Relevance in Economics
• Simultaneous games are games in which
players make their strategy choices at the
same time.
• Sequential games are games in which
players make their decisions sequentially.
• In sequential games, the first mover may
have an advantage.
41. Games of Particular
Relevance in Economics
• Consider the following payoff matrix in which
firms choose their capacity, either high or low.
• Suppose firm C has the ability to move first.
– C would choose Low, then D would choose High.
42. Game Theory and Auctions
• Non-cooperative, non-zero-sum game
• Seller wants to sell at highest price, buyer wants
to buy at lowest price.
• Dutch Auction
– All product sold at the highest price that clears the
market
– Each buyer describes the quantity demanded and
price to pay
– Starting at highest price, sum quantity demanded up
to the quantity available. The associated price for the
last quantity added is the price for all products.
• In an auction with a time limit, every player has a
dominant strategy to bid as late as possible.
43. Extensions of Game Theory
• Tit-For-Tat Strategy
– Stable set of players
– Small number of players
– Easy detection of cheating
– Stable demand and cost conditions
– Game repeated a large and uncertain
number of times
44. Strategy and Game Theory
• Fundamental aspects of game theory
– Players are interdependent
– Uncertainty: other players’ actions are not entirely predictable
• PARTS: paradigm for studying a situation, predicting
players’ actions, making strategic decisions
– Players: Who are players and what are their goals?
– Added Value: What do the different players contribute to the pie?
– Rules: What is the form of competition? Time structure of the
game?
– Tactics: What options are open to the players? Commitments?
Incentives?
– Scope: What are the boundaries of the game?