Game Theory

Question 1

What is the Nash equilibrium?

Answer 1

When there is no incentive for a firm to change what it is doing in relation to the activities of a competitor firm (stable equilibrium), even though they know its strategy

Question 2

What is a dominant strategy?

Answer 2

One that is optimal no matter what the opponent does

Question 3

What does Cournot’s model show?

Answer 3

Two firms competing for how much output they can sell

Question 4

What does Cournot’s model assume?

Answer 4

That the identical companies are selling homogenous products, and each firm believes the competitor is producing a fixed quantity of output

Question 5

What do reaction curves show?

Answer 5

The reaction of A to different output levels for B

Question 6

What does the Stackelberg model show?

Answer 6

Questions whether firms would move first into the market with the second following - that competitors will do the opposite in order to maximise profits (given awareness of what the other firm is doing, should choose a strategy that competes against that)

Question 7

What does the Bertrand model show?

Answer 7

That firms compete against price instead of output [if any firm charges a lower price than its competitor it will capture the entire market; if firms charge the same price, customers are indifferent and each firm takes half the market]

Question 8

What does the Bertrand model imply?

Answer 8

That everyone has an incentive to cut the price until it = MC, and change behaviour until that point

Question 9

Why is the breakeven point the limit for incentives to undercut price?

Answer 9

If firm 1 raises prices, it will lose all sales to firm 2. If it lowers prices, it will capture the entire market but incur losses because it isn’t earning as much