Game theory Flashcards
What is game theory?
Studys strategic behaviour which takes into account the expected behaviour of others and the mutual recognition of interdependance.
Define the following:
-players
strategy
actions
pay offs
decision rules
- 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.
Whats a simulataneous move game/ normal form game?
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.
Explain the prisoner dilemma theory?
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
What outcome yields a nash equilibirum?
Where both players make a rational decision in their own self interest that is best for them, given any action taken by another.
What is a dominant strategy?
Doesnt matter what course of action the other player makes, you have one strategy that is best for you.
What is the pure strategy nash equilibirum for prisoners dilemma?
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.
Is nash equilibrium pareto efficient or pareto superior?
Pareto superior as there is no situation available that leaves at least one player better off and no one worse off.
What is a repeated game and how does it affect the prisoners dilemma?
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.
What are the punishment strategies involved in the prisoners dilemma?
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.
Explain an oligopoly game when a cartel is formed?
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)
Explain game of chicken?
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
What is the nash equilibrium with game of chicken and the pay off?
(Go straight, swerve) (1,4)(4,1) - is not a dominant straegy equilibirum
Explain matching pennies?
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.
How is equilibrium acheived in game theory?
By iteration (deletion) of dominant strategy