Week 3 - Game theory & industrial optimisation

Question 1

Best response

Answer 1

Given what the other player is doing, what is the best ACTION to get highest possible payoff

Question 2

Nash equilibrium

Answer 2

A set of strategies in which both players are best responding to each other’s strategy

Question 3

Mixed strategy NE

Answer 3

A set of strategies in which both players randomise (play a strategy w/ a given probability) because they are indifferent between their actions, given the probability with which the other player chooses their strategy.

*indifferent b/c the strategies yield the same EXPECTED PAYOFF

Question 4

Subgame perfect NE (SPNE) + describe players’/firms’ actions

Answer 4

A set of strategies that constitutes a NE in every sub-game

• First mover advantage
• Firm 1 anticipates the best reaction of firm 2 and takes into account when deciding their output at stage 1 (Stackelberg competition - firms decide QUANTITY of output to produce)