Game theory

Question 1

What are some examples of interactions that do not take place in competitive markets?

Answer 1

Allocation problems (e.g., social housing)
Contracts & Agreements (e.g., between firms or individuals)
Advertising and Public Relations
Hiring decisions, Job search, Assignment problems
Strategic choices of firms, such as mergers or acquisitions
Bargaining problems (e.g. unions vs employers)

Question 2

What is a static game?

Answer 2

Static games in which players act once and simultaneously

Question 2

What is a dynamic game?

Answer 2

Where players move either repeatedly or sequentially

Question 3

What are the assumptions we make on players abilities, knowledge and motivations?

Answer 3

Players are rational and self-interested and maximise their payoffs
- They have common knowledge
- they have complete information

Question 4

Which number in the game theory table responds to player 1?

Answer 4

The first number is the payoff for player 1

Question 5

How do firms try and maximise their profits for game theory?

Answer 5

Firms try to maximise their payoff based on its belief about rivals behaviour

Question 6

How do rational agents act?

Answer 6

They maximise their own payoff avoiding dominated strategies

Question 7

What is a dominated strategy?

Answer 7

A strategy that produces a lower payoff than some other strategy for every possible combination of its rivals strategies

Question 8

What is the relevance of the prisoners dilemma?

Answer 8

Illustrates a situation where self-interested behaviour leads to suboptimal outcomes

Question 9

What are the two key properties of the Nash equilibrium?

Answer 9

-Each player maximises her payoff given her belief about the other players choices
- Each player correctly anticipates the others actions

Question 10

What is a Nash equilibrium?

Answer 10

The Nash equilibrium is where no player can obtain a higher payoff by being the only one to choose a different strategy

Question 11

How do you find the best response for player 1?

Answer 11

Fix the column of the opponent and choose the row which gives the highest payoff

Question 12

What is suggested about noncooperative firms?

Answer 12

They may not reach the joint-profit maximising outcome in equilibrium

Question 13

What is a network externality?

Answer 13

Each group benefits more from using the platform the more people there are in other groups using it

Question 14

What is balanced pricing?

Answer 14

Both merchants and consumers pay fees

Question 15

What is unbalanced pricing?

Answer 15

Only merchants pay fees

Question 16

What is true of many oligopoly games?

Answer 16

Many oligopoly games have more than one Nash equilibrium

Question 17

What is the self-enforcing agreement?

Answer 17

Firms negotiate and discuss which equilibrium they should play prior to choosing their action

Question 18

Why is a Nash equilibrium sometimes unappealing?

Answer 18

Because they call for identical firms to use different strategies

Question 19

How does a mixed strategy Nash equilibrium differ to a pure strategy Nash equilibrium?

Answer 19

Pure strategy assigns a probability of 1 to a single action. Mixed strategy is a probability distribution over actions.

Question 20

How does a player choose a mixed strategy, Nash equilibrium?

Answer 20

Each player chooses the probabilities of their actions, so that the other player or players are indifferent between the actions and their mixed strategy

Question 21

What is true about a Nash equilibrium under a mixed strategy?

Answer 21

With a mixed strategy, a Nash equilibrium always exists

Question 22

What are extensive games?

Answer 22

Each move can be dependent on previous ones

Question 23

What is an extensive game characterised by?

Answer 23

• A set of players
• Histories
• Player functions
• Payoffs at each terminal histories

Question 24

What is a strategy for a player in an extensive game?

Answer 24

A complete set of instructions that specifies an action for all possible turns of a player

Question 25

What is a Nash equilibrium under an extensive game?

Answer 25

The same as before, if no player can be better off by unilaterally changing his/ her own strategy given the other players strategies

Question 26

How does the notion of subgame perfect equilibrium refine the Nash equilibrium?

Answer 26

It rules out non-credible threats

Question 27

What is a subgame perfect equilibrium?

Answer 27

A Nash equilibrium which has the property that it constitutes a Nash equilibrium in the continuation play at every stage throughout the game irrespective of what has happened in the past