Game theory Flashcards

1
Q

What is game theory?

A

Studys strategic behaviour which takes into account the expected behaviour of others and the mutual recognition of interdependance.

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2
Q

Define the following:
-players
strategy
actions
pay offs
decision rules

A
  • decision makers
  • players plan of action
  • particular things done according to the strategy
  • rewards
  • strategy the specifies what action will be taken conditional on what happens before.
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3
Q

Whats a simulataneous move game/ normal form game?

A

Whereby both players make their strategies sinulatneously without knowing the strategy of the other e.g 2 firms independantly decide whether to develop a new product.

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4
Q

Explain the prisoner dilemma theory?

A

2 prisoners-
- if one confesses he gets a 1 year sentence and accomplice gets 10
- if both confess then both get 3 years
- if neither confess then both get 2 years

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5
Q

What outcome yields a nash equilibirum?

A

Where both players make a rational decision in their own self interest that is best for them, given any action taken by another.

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6
Q

What is a dominant strategy?

A

Doesnt matter what course of action the other player makes, you have one strategy that is best for you.

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7
Q

What is the pure strategy nash equilibirum for prisoners dilemma?

A

confess, confess as if player 1 confesses player 2 should confess, if player 1 doesnt confesses then player 2 should confess and same for player 2.

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8
Q

Is nash equilibrium pareto efficient or pareto superior?

A

Pareto superior as there is no situation available that leaves at least one player better off and no one worse off.

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9
Q

What is a repeated game and how does it affect the prisoners dilemma?

A

Games is played repeatedly giving the players (duopolists) an opportunity to collude and make a monopoly profit.
Additional punishment strategies enable the firms to comply and acheive a cooperative equilibirum where the firms can make and share monopoly profit.

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10
Q

What are the punishment strategies involved in the prisoners dilemma?

A

Tit for tat - if one player cooperated the previous period the other player will cooperate this time but if they cheated last time they will cheat this time.
Trigger strategy - one player cooperates if the other cooperates but will play by nash equilibirum forever after if they cheat.

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11
Q

Explain an oligopoly game when a cartel is formed?

A

2 players with 2 strategies to either cheat or comply
if both comply = £2m
if niether comply = £0
if one complies and the other cheats = player that complies = -£1m and player that cheats = £4.5m
Nash equilibirum will be (cheat, cheat) Pay off (0,0)

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12
Q

Explain game of chicken?

A

2 people drive at each other have 2 strategies to go straight or swerve. If both go straight they die, if one goes straight he is the hero and the swerver is the chicken

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13
Q

What is the nash equilibrium with game of chicken and the pay off?

A

(Go straight, swerve) (1,4)(4,1) - is not a dominant straegy equilibirum

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14
Q

Explain matching pennies?

A

2 players choose simultaneously whether to show heads or tails of a coin
if they show same side, player 2 pays 1 a pound
if they show different sides player 1 pays player 2 a pound.
There is no nash equilibirum.

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15
Q

How is equilibrium acheived in game theory?

A

By iteration (deletion) of dominant strategy

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16
Q

What is a sequential game and how is it illustrated?
When might they be used?

A

Players take turns to make moves. Illustrated in a game tree referred to as extensive form.
Might be used in competitve markets where they face potential entry from other firms.