Mod 4 - Topic 4 - Game Theory Flashcards
What are the two shortcomings that economic optimisation has when applied to actual business situations?
1) assumes factors such as reaction of competitors or tastes and preferences of consumers remain constant.
2) manager sometimes make decisions when other parties have more information about the market conditions.
What is game theory?
It is concerned with how individuals make decisions when they are aware that their actions affect each other and when each individual takes this into account.
What are the fundamental aspects of game theory (2)?
- Players are interdependent
* There is uncertainty
What is a dominant strategy?
A strategy that produces the optimal outcome regardless of what other players do.
What is dominant strategy equilibrium?
Where each player chooses its dominant strategy.
What is a Nash equilibrium?
Where every player’s strategy is optimal given its competitors strategies.
What is the prisoners dilemma?
Where to confess is both players dominant strategy.
What is a cooperative game?
Indicates players can negotiate explicit binding contracts over various states.
What is a non-cooperative game?
Negotiation and contracts are not allowed.
What is a zero-sum game?
Where the sum of payouts is constant and do not alter. Most gems are variable sum where the sum of payouts for each set of strategies varies.
What is tacit bargaining?
Bargaining that is not openly expressed but is implied by others actions (and can occur in non-cooperative scenarios)
What is the conundrum in an oligopoly situation?
Both firms have a desire to achieve a high/high outcome, but as each firm has an incentive to deviate, it often ends up at low/low, so no firm has that incentive.
What are five types of Nash Equilibrium strategies?
- Dominant strategy - both do best regardless of other
- Nash equilibrium - Do best given what other does
- Maximin Strategy - maximise minimum gain
- Pure strategy - player makes specific choice/action
- Mixed strategy - player makes random choice among two or more actions based on a set of chosen probabilities.
What is a repeated game?
A game that is played repeatedly over a period of time. Equilibria is not stable due to the threat of retaliation.
Why can the period not be fixed?
Because players have an incentive to cheat in the last period due to the removal of the threat of retaliation. Because this exists in the last period, each player second guesses and the result is both players charge a lower price every period.
