game theory

Question 1

what is the prisoners dilemma

Answer 1

a game theory paradox that illustrates how two rational individuals can choose not to cooperate, even when it would be in their best interest to do so

Question 2

what is a dominant strategy

Answer 2

in reaction to the action of firm a, firm b will choose the same strategy

Question 3

define nash equilibrium

Answer 3

a strategy that when all players use this strategy, no player can obtain higher profits using a different strategy

Question 4

can there be multiple nash equilibriums

Answer 4

yes

Question 5

what are the steps to determining a dominant strategy

Answer 5

1) determine each firms best response to any given strategy of the other firm
2)check whether any pairs of strategies are best responses for both firms

Question 6

what is a mixed strategy

Answer 6

when a player chooses actions according to the probability it assigns to each action

Question 7

what is the formula for working out the probability and therefore the outcomes

Answer 7

P(R1) + Po (1-R1)
P = payoff for that action
R1 = a response to the action
Po = the alternate payoff for the action taker should the second mover choose the other action

Question 8

what are the statutes of a static game

Answer 8

-each competitor only acts once and moves simultaneously
-perfect information about the payoff
-imperfect information about the other firm

Question 9

do firms choose output level or price

Answer 9

output level

Question 10

in a static game are firms better off cooperating or not

Answer 10

cooperating in order to raise profits

Question 11

how is a dynamic game different from a static game

Answer 11

the firms move more than once so they have information about the other firms previous moves

Question 12

what is an action

Answer 12

a single move that a player makes at a specified time

Question 13

what is a strategy

Answer 13

a battle plan that specifies the full set of actions that a player will make throughout the game

Question 14

in what type of game are cartels more likely to appear in

Answer 14

multi-period games

Question 15

what is signalling

Answer 15

where a firm may lower their quantity to signal for a rival firm to lower theirs in order to make a higher profit

Question 16

what is a trigger strategy

Answer 16

when a firm breaks a collusion agreement, the other firm will punish it by producing at a higher output to lower the cheating firms profits

Question 17

what is a sequential dynamic game

Answer 17

where one firm moves before another

Question 18

what do we assume about a sequential move game

Answer 18

perfect info about the previous moves and the payoff function

Question 19

what is a subgame perfect nash equilibrium

Answer 19

when a set of strategies is a perfect nash equilibrium in every sub game

Question 20

how do we find a subgame nash equilibrium from a game tree

Answer 20

backwards induction

Question 21

are all strategies always subgame nash equilibrium

Answer 21

no

Question 22

how can a firm stop another firms from entering the market

Answer 22

• exclusion contracts
• limit pricing

Question 23

what is an exclusion contract

Answer 23

where a firm pays another firm of the owner of the land its on to not let a competitor enter the market

Question 24

what is blockaded entry

Answer 24

despite not paying the exclusion contract, a competitor does not enter the market as P-F <0

Question 25

what is deterred entry

Answer 25

the incumbent firm will only pay exclusivity fee if the profit it gains from paying is greater than the profit it gains from not paying and a competitor entering

Question 26

what is accommodated entry

Answer 26

when the incumbent does not pay the exclusivity fee as it is to high

Question 27

what is limit pricing

Answer 27

when the incumbent firm sets price or output below the marginal cost of a potential entrant so its not profitable to enter

Question 28

what is a condition of limit pricing

Answer 28

• the incumbent firms threat must be credible
• the incumbent firms costs must be lower than the entrants

Question 29

what is a disadvantage with moving first

Answer 29

hold up problem

Question 30

what is the hold up problem

Answer 30

the firm who moves first is at a disadvantage as it has committed capital to the agreement