5 - Game Theory

Question 1

How many players and strategies are there

Answer 1

2 players, 2 strategies per player (4 strategies in total)

• Players play simultaneously (at the same time)

Question 2

Who’s pay off shows first

Answer 2

Player A, the player on the lefts number is the number on the left (first number)

Question 3

What’s the Nash equilibrium

Answer 3

A play of the game where each strategy is a best reply to the other

Question 4

How do you know if there’s a pure strategy Nash equilibrium

Answer 4

When there’s 2 circles in a quadrant (square), after solving the game

Question 5

Always use which statement when figuring the game

Answer 5

“If” statement. This is because for example, “If” A goes up, what would B do, and choose one of B’s number

Question 6

What’s the prisoners dilemma

Answer 6

• To explain the behaviour seen in the game
• Two agents been arrested and questioned in separate rooms, without any communication between each other
• These 2 players are both rational players
• ‘0’ means free from prison, ‘-1’ means 1 year in prison and so on
• Each person has ‘S’ meaning stay silent and ‘C’ meaning confess
• Then solve the game as you would

Question 7

How to overcome the prisoners dilemma

Answer 7

• Sometimes The Nash equilibrium for the prisoners dilemma isn’t always the best payoff for the 2 players as the 2 players cannot communicate
• To overcome this you could do REPEATED INTERACTIONS
• Repeated interactions would help because, some players may engage in strategic behaviour, sacrificing short-run profit to influence future behaviour
• In repeated prisoner’s dilemma games, tit-for-tat is often a good strategy, leading to successful tacit collusion

Question 8

What is tit-for-tat strategy

Answer 8

Playing cooperatively first, then doing whatever the other player did in the previous period

Question 9

Why are mixed strategies used

Answer 9

When there is no pure strategy Nash equilibrium because there isn’t always one in pure strategy, however there is always one in mixed strategies

Question 10

What’s involved in mixed strategies

Answer 10

Probabilities

Question 11

What’s a pure strategy

What’s a mixed strategy

Answer 11

Pure strategy = Strategy that maximises profit (best outcome). No one will get better outcome if they move

Mixed strategies = Don’t have a certain action, but base decision off probability

Question 12

Who are the players

Answer 12

Firms mainly, or individuals

Question 13

What’s a payoff

Answer 13

Outcome of the game