micro 11 Flashcards
strategic behavior
Decisions that take into account the predicted reactions of rival firms
game theory
Concerned with the choice of the best or optimal strategy in conflict situations- think of way rival is going to react (think of chess)
game theory models (fundamentals)
Players- who is playing the game? Company A, B, C
Strategies-
Payoff Matrix- if we both do A then what are the outcomes
type of game
zero sum game and non zero sum game
zero sum game
-100 and +100; win and lose
non-zero sum game
maybe we both gain but one gains more than the other
Positive-Sum Game
Negative-Sum Game
dominant strategy
Optimal choice for a player no matter what the opponent does. Do this regardless of what competition can do. First look for this when you are trying to solve a game
nash equilibrium
Each player chooses a strategy that is optimal given the strategy of the other player.
prisoners dilemma
If you confess and your accomplice does not, you will go free. If you do not confess and your accomplice does, you will get 10 years in prison. If you both confess, you will both get 5 years in prison.
applications of game theory
Payoff Matrix can be adapted to study various issues by changing the headings “Confess”, “Don’t Confess” to:
Low Price, High Price
Cheat, Don’t Cheat
Advertise, Don’t Advertise
Enter the Market, Don’t Enter
repeated games
Games involving many consecutive moves and countermoves by each player.
tit-for-tat
Do to your opponent what you opponent has done to you. It requires:
-Stable set of players
-Small number of players
-Easy detection of cheating
-Stable demand and cost conditions
-Game repeated a large and uncertain number of times
threat strategies
Credibility
Reputation
Commitment
Example: Entry deterrence
