06. Game Theory and Business Strategy Flashcards
When is a game cooperative?
if the players can communicate and arrange binding contracts
When is a game non-cooperative?
if players cannot communicate; here, it is essential to understand your opponent´s point of view and to deduce his or her likely responses to your actions
-> awareness of anothers existence, and typically know the payoffs, but they act independently
Nash Equilibrium | Definition
an outcome where both players correctly believe that they are doing the best they can, given the action of the other player
in an equilibrium, no player has an incentive to change their choice, unless there is a change by another player
Bargaining Problem | Definition
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non-trivial bargaining situations have multiple mutually acceptable settlements
basically, negotiating over the terms of an agreement
can be explicit and enforceable, or it can be tacit and formally unenforceable
Maximin stragety | Definition
a player determines the worst outcome that can occur for each of the possible actions; then he chooses the action that maximizes the minimum gain that can be earned
Pure strategy | Definition
a player makes a specific choice or takes a specfic action
Mixed strategy | Definition
a player makes random choice among two or more possible actions, based on a set of chosen probabilities
Repeated Games | Definition
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- a static game played multiple times over different periods
- firms can here adopt strategies based on past interactions
- actions in one period can affect competitors future actions
- possibility to cooperate to maintain higher prices
Sequential Games | Definition
if firms acts before rival, it may gain advantage by converting what would be an empty threat to its rival ino credible, observable action
Deterring entry | Definition
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- strategies to prevent new competitors from entering a market
- but the first firms action must be credible and irreversible
What are the three types of Nash equilibrium?
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- unique N.E.: only one combination of strategies is each firms strategy a best response to its rival strategy (e.g. bertrand and cournot)
- multiple N.E.:
- mixed strategy N.E.: when players are not certain which strategy to take and dont know others strategy
What are the three steps to find a nash bargaining solution?
- find the profit at the disagreements point (outcome if no agreement is reached, call it d): dA = dU = 4
- if a proposed agreement is reached, the firm earns a profit of π and a net surplus, π – d.
- the Nash bargaining solution is the outcome in which each firm receives a non-negative surplus and in
which the product of the net surplus of the two firms (called the Nash product, NP) is maximized.
What are reasons for the Nash bargaining solutions being inefficient in real life?
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- bargaining process takes time, which delays the start of benefit flow and thus reduced value of benefits overall (eg strike)
- negotiators failing to quickly reach an agreement due to bounded rationality or incomplete information about the other side´s profits
What is the key feature that distinguishes a Nash equilibrium from an equilibrium in dominant strategies?
the dependence on the opponent’s behavior
Does the prisoners’ dilemma doom oligopolistic firms to aggressive competition and low profits?
Not necessarily. Although our imaginary prisoners have only one opportunity to confess, most firms
set output and price over and over again, continually observing their competitors’ behavior and
adjusting their own accordingly. This allows firms to develop reputations from which trust can arise.
Implicit collusion | Definition
Firms may be able to engage in such implicit collusion or tacit collusion using
trigger, tit-for-tat, or similar strategies, as long as firms do not explicitly communicate each other
Repeated games | Cartel is much like a…..
prisoners dilemma
need to easily observe each others plays and react quickly to undesired behavior
Grim Trigger strategy | Definition
(within repeated prisoners dilemma)
if anyone has defected at any point, defect forever. otherwise, cooperate
at start no one did anything before, so acc to this strategy, you cooperate
What are the two conditions to check in a grim trigger strategy?
- if defection has been triggered, is it an equilibrium to continue defection forever?
- in no one has defected previously, would anyone want to?
Whats a tit for tat strategy?
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A tit-for-tat strategy for repeated prisoners’ dilemma games sets cooperation in the 1st round, then
copies the rival’s previous action in each subsequent round.
it may not induce cooperation in the Airline repeated game if the extra profit in period t
is greater than the loss from the punishment in period t + 1.
However, if the tit-for-tat strategy is modified to extend the punishment for more than one period,
then it may ensure cooperation. The extension of time should be enough to more than
compensate the one time extra profit.
Whats an implicit collusion?
Firms may be able to engage in such implicit collusion or tacit collusion using
trigger, tit-for-tat, or similar strategies, as long as firms do not explicitly communicate each other.
Whats the difference between a strategy and an action?
Strategy: s a battle plan that specifies the full set of actions that a player will make
throughout the game.
Action: a single move that a player makes at a specified time, such as choosing an output
level or a price.
Whats a Strategy in repeated games to Avoid a Prisoner’s Dilemma Outcome?
Firms can follow a trigger strategy, in which a
rival’s defection from a collusive outcome triggers a punishment.
Sequential Game | Characteristics
Firms can follow a trigger strategy, in which a
rival’s defection from a collusive outcome triggers a punishment.
How can we do a Backward induction for subgame perfect Nash-equilibrium?
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- determine best response by the last player to move
- determine best response for the player who made the next to last move
- etc… until we reach the first move of the game
Limit Pricing
- Stackelberg leader acts first and produces a (1: large/small?) quantity so that the follower produces… (2)
- The leader makes limit pricing credible by…(3)
- large
- a smaller quantity with no profit.
- committing to provide a very large output level
Moving First | What can we say about a firm moving first with regards to…
- Moving first and its own MC?
- Moving first and its rivals MC?
- moving first to gain MC advantage over its rivals; it can lower its MC by using a capital investment or increasing the rate of learning by doing
- a firms moves first to increase the rivals MC by more than its own
What are some disadvantages of entering a market first?
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- costs of entering quickly is higher
- odds of misclalculating demand are greater
- later rivals may build on the pioneers research to produce superior product
What is an example of first mover advantage?
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- acting first can lead to lower production costs or innovation benefits
- early investment in technology or processes reduced MC
- learning by doing
- raising rivals costs -> should hurt rival more than oneself
- A current account deficit requires a net capital….
- A current account surplus requires a net capital…..
- inflow
- outflow (e.g. investing abroad)
