Chapter 13

Question 1

Strategic behavior

Answer 1

actions taken by firms to plan and react to competition from rival firms

Question 2

Oligopoly

Answer 2

market consisting of a few large firms, each with substantial market power and recognition of their interdependence

Question 3

What does the interdependence of firm’s profits mean for oligopolies?

Answer 3

The price set by one firm affects the other firms’ price and output decisions, also affecting demand and MR conditions for every other firm in the market

Question 4

Simultaneous decision games

Answer 4

competing firms do not know each other’s decisions

Question 5

Common knowledge in game theory

Answer 5

situation in which all decision makers know the payoff table and believe their rivals know it as well

Question 6

Dominant strategy

Answer 6

action that produces the best outcome no matter what decision rivals make, the decision a rational person would make in any case

Question 7

Dominant strategy equilibrium

Answer 7

when both players have dominant strategies and play them

Question 8

Prisoner’s dilemma

Answer 8

all rivals possess a dominant strategy and play them, making everyone worse off than if they had cooperated in decision making

Question 9

Can a firm predict another’s actions? Under what circumstances?

Answer 9

If a firm does not have a dominant strategy, they can predict the action of a rival who does have a dominant strategy. Then, the non-dominant strategy firm will choose based off of what actions they thing their rivals will make

Question 10

Dominated strategy

Answer 10

strategies not chosen regardless of what other players may choose to do, subject to successive elimination

Question 11

What do firms do when there is no dominant strategy for anyone?

Answer 11

eliminate the dominated strategies until there are no more

Question 12

Nash equilibrium

Answer 12

set of actions for which all firms are choosing their best actions given what the other players are doing

Question 13

Strategic stability

Answer 13

in a Nash cell, no decision maker can unilaterally change its decision and improve individual payoff

Question 14

Why are Nash decisions so likely to be made?

Answer 14

They are mutually best and, therefore, strategically stable. Non-Nash decisions are unlikely because it is easy to create a better payoff by moving unilaterally

Question 15

Are dominant strategy equilibria always Nash equilibria?

Answer 15

Yes, though not all Nash have dominant/ dominated strategies

Question 16

Best response curve

Answer 16

curve indicating the best decision (usually the profit maximizing one) given the decision a firm believes its rivals will make

Question 17

Where is Nash equilibrium when given a price pair for two or more firms on a graph?

Answer 17

where the best response curves intersect

Question 18

Sequential decisions

Answer 18

when one player makes their decision before the other(s)

Question 19

Game tree

Answer 19

diagram showing the structure and payoff of a sequential decision situation

Question 20

Rollback method

Answer 20

finding a Nash solution to a sequential decision by looking at future decisions to reason back to the best current decision

Question 21

First/ Second mover advantage

Answer 21

the increased payoff when a player goes first or second, respectively