Oligopoly pt4

Question 1

Prisoners dilemma

Answer 1

In this 2 person game, they have to decide whether to stay silent and deny their crime or confess and betray each other

Question 2

Prisoners dilemma explained

Answer 2

It illustrates why it is difficult to cooperate even when in the best interest of both parties. Both players are assumed to select their own dominant strategies for personal gain/self interest. Eventually they will reach an equilibrium in which they are both worse off than if they agreed to an alternative strategy.

Question 3

Nash equilibrium

Answer 3

It describes any situation where all the participants in a game are pursuing their best possible strategy given the strategies of all the other participants. Occurs when player A takes the best possible action given the action of player B and vice versa.

Question 4

Game theory - a simple pricing game

Answer 4

In this 2 firm game they have to decide whether to set high or low prices and are assumed to make this decision at the same time. Regardless of what the other firm does, it is in a firms bets interest to lower price. If both firms decided to collude and increase their prices, they would both earn higher total profits which is pareto optimal.

Question 5

Game theory-Non price competition

Answer 5

In this case, the decision is whether to engage in non price competition and the payoff is revenue gained. The dominant strategy is for both firms to advertise-Nash equilibrium.