game theory Flashcards
what is the prisoners dilemma
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
what is a dominant strategy
in reaction to the action of firm a, firm b will choose the same strategy
define nash equilibrium
a strategy that when all players use this strategy, no player can obtain higher profits using a different strategy
can there be multiple nash equilibriums
yes
what are the steps to determining a dominant strategy
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
what is a mixed strategy
when a player chooses actions according to the probability it assigns to each action
what is the formula for working out the probability and therefore the outcomes
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
what are the statutes of a static game
-each competitor only acts once and moves simultaneously
-perfect information about the payoff
-imperfect information about the other firm
do firms choose output level or price
output level
in a static game are firms better off cooperating or not
cooperating in order to raise profits
how is a dynamic game different from a static game
the firms move more than once so they have information about the other firms previous moves
what is an action
a single move that a player makes at a specified time
what is a strategy
a battle plan that specifies the full set of actions that a player will make throughout the game
in what type of game are cartels more likely to appear in
multi-period games
what is signalling
where a firm may lower their quantity to signal for a rival firm to lower theirs in order to make a higher profit
what is a trigger strategy
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
what is a sequential dynamic game
where one firm moves before another
what do we assume about a sequential move game
perfect info about the previous moves and the payoff function
what is a subgame perfect nash equilibrium
when a set of strategies is a perfect nash equilibrium in every sub game
how do we find a subgame nash equilibrium from a game tree
backwards induction
are all strategies always subgame nash equilibrium
no
how can a firm stop another firms from entering the market
- exclusion contracts
- limit pricing
what is an exclusion contract
where a firm pays another firm of the owner of the land its on to not let a competitor enter the market
what is blockaded entry
despite not paying the exclusion contract, a competitor does not enter the market as P-F <0
what is deterred entry
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
what is accommodated entry
when the incumbent does not pay the exclusivity fee as it is to high
what is limit pricing
when the incumbent firm sets price or output below the marginal cost of a potential entrant so its not profitable to enter
what is a condition of limit pricing
- the incumbent firms threat must be credible
- the incumbent firms costs must be lower than the entrants
what is a disadvantage with moving first
hold up problem
what is the hold up problem
the firm who moves first is at a disadvantage as it has committed capital to the agreement
