Final Review Flashcards
The study of how interdependent decision makers make choices.
Game Theory
A game must include: ___,___,__,___,___,___,___.
Players, actions, strategies, payoffs, outcomes, equilibria, and information.
The decision makers.
Players
includes all of the possible moves that a player can make.
Actions
Are rules telling each player which action to choose at each point in the game.
Strategies
Usually consist of the profits or expected profits the players receive after all of the players have picked strategies and the game has been played.
Payoffs
the game is a set of results the modeler selects from the values of actions, payoffs, and other variables after the game has been completed.
Outcome
a strategy combination that consists of the best strategy for each player in the game.
Equilibrium
modeled by defining how much each player knows at each point in the game.
Information
Each player knows every move the other players have made before taking any action.
Perfect Information
a player of random actions. Many games modeled by economists require a pseudo-player,
nature, to take random actions at some point, or points, in a game.
Nature
some players have more information
than other players at the beginning of the game.
Incomplete information
In games including nature, if nature never moves after any other player moves, the
game is said to be of
Certain Information
; if nature moves after another player has moved, the game is
said to be of
Uncertain Information
If all players have exactly the same information when each player moves, the
game is said to be of
Symmetric Information
if some players have different information than other
players, the game is played with
Asymmetric Information
a strategy that outperforms any other strategy no matter what strategy an
opponent selects.
A dominant strategy
the only one of the game’s cells where both players are doing the best they can when
given the choice of their opponent.
Nash Equilibrium
Sequential games are known as ____ and represented by ____
Dynamic games; Game trees
a game that starts at any decision point or node in a game and continues to the
end of the game
Subgame
a point in an extensive form of a game at which a player or nature takes an action, or
the game ends.
a node
The game tree representation of the game is known as the
Extensive Form
Game theorists distinguish the extensive form of a game from the simpler
Strategic Form
In a cournot model what does each firm believe about its competitors
its competitors will always maintain its current output.
two identical firms, Identical costs and there is no product differentiation, Price is
a simple function of the total quantity produced by the two firms.
Duopoly market
the leader makes a more logical assumption than the follower, and as a result,
the game’s equilibrium changes.
The Stackelberg Model
price falls to MC, the perfectly competitive price, and there is allocative efficiency.
Bertrand Duopoly.
The solution to this Bertrand-Edgeworth model with capacity constraints is for each firm to take turns
undercutting each other until one of the two reaches a certain low fare, at which point the other
increases its fare back up to the high fare, and then the cycle starts all over again.
Edgeworth Cycle
In practice, it is much more common to find industries in which there is a _____ ____ as well some
number of smaller ____ firms.
Dominant Firm; fringe.
Two factors can lead to a dominant firm–competitive fringe market structure:
- The dominant firm may have a significant cost advantage compared to its rivals, due to superior
technology, management, or location or early entry and learning by doing, resulting in lower
costs than rival firms. - The dominant firm may have a superior product.
contends that potential competition may be more
important than actual competition and that even a completely monopolized market may
perform as if it were perfectly competitive in structure.
Contestable markets hypothesis
Three basic assumptions:
- Free Entry
- Entry is absolute
- No sunk costs are associated with entry.
means that incumbent firms have no advantages, and there are no barriers to
entry.
Free Entry
e. If a potential entrant enters the market and charges a price below the
incumbent’s price, then the entrant will completely displace the incumbent.
Entry is Absolute
Permits “hit-and-run” entry in which firms can enter
a market, extract profits for a period of time, and then withdraw with zero sunk cost losses.
No sunk costs are associated with entry
products that must be consumed together with other products
complements
the value of goods or services produced in network industries to a potential customer depends on the number of consumers already owning that good or using that service.
Consumption Externalities
most users don’t like learning features of a new operating system, a new word-processing program, or a new spreadsheet. In the presence of significant switching costs, consumers are locked in to using a specific service or product.
Switching costs and lock-in
Price discrimination occurs whenever
the difference in prices between consumers is not proportional to the difference in costs.
Discrimination can occur only if
Market power exists.
involves charging a different price to each customer.
First degree price discrimination.
All consumers are offered the same price schedule, and then consumers self-select into different price categories.
Second Degree Discrimination
Firms are able to separate consumers into two or more groups according to their different elasticities of demand.
Third-degree price discrimination
consists of lump sum payment for a good service combined with a per unit user charge.
Two-part-tariff
consumers can purchase a good only if they agree to purchase another
good.
Tie-in sales agreement
two subdivided tie-in sales agreement
package tie-in sales or bundling
requirement tie-in sales
a tying agreement in which goods are purchased in fixed proportions.
Bundling
the consumer willing to pay more for one good is willing to pay less for the other good.
Negatively Correlated.
one consumer would be willing to pay more for both goods
and bundling would not increase total revenues.
Positively Correlated
