13 - Game Theory

Question 1

What is…..

a game?

Answer 1

strategic decision taking into account each other´s actions and responses

Question 2

What is….

1. a cooperative game?
2. a non-cooperative game?

Answer 2

1. game with option of binding contracts and hence, coordinated behaviour (joint strategies)
2. game without option of binding contracts and hence, no coordinated behaviour (no joint strategies)

Question 3

What is….

1. a payoff?
2. an optimal strategy?
3. a nash equilibirum?

Answer 3

1. value associated wiwth possible outcome of action and response
2. strategy maximizing a player´s expected payoff
3. optimal strategy for each player given optimal strategy of the other players (no incentive for changing behaviour) | Non-cooperative equilibrium

Question 4

What is a….

1. fixed-sum game?
2. zero-sum game?
3. a non fixed sum game?

Answer 4

1. game in which sum pay offs is fixed (“splitting a cake”), e.g. sales negotiaions
2. game in which fixed sumn is zero (“profits ar others expense”)
3. non-fixed sum game: game in which the sum pay offs depends on actions of the players

Question 5

What is a dominant strategy?

Answer 5

• optimal strategy no matter what the opponent does

Question 6

What happens when both players have a dominant strategy?

Answer 6

outcome of the game is called equilibrium in dominant strategies -> each firm is doing the best it can regardless of what its competitors are doing