Chapter 15 Oligopoly pages 396404 Prisoners Dilemma Police arrest you and a partner with enough evidence to send you both to jail for 1 year They know you committed a worse crime that carries 20 years but dont have enough evidence ID: 782610
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Slide1
Introduction to Game Theory
Chapter 15: Oligopoly (pages 396-404)
Slide2Prisoner’s Dilemma
Police arrest you and a partner with enough evidence to send you both to jail for 1 year
They know you committed a worse crime that carries 20 years but don’t have enough evidence
If one of you confesses you are set free while the other serves 20 years
If you both confess each gets 3 years
What do you do?!?
Slide3Prisoner’s Dilemma
Prisoner 2
Confess
Not Confess
Prisoner 1
Confess-3, -30, -20Not Confess-20, 0-1, -1
Slide4Slide5Game Theory
Explains how interdependent firms make decisions
PAYOFF MATRIX
used to assess choices
Slide6Payoff Matrix
Advertise
Don’t Advertise
Advertise
80, 80
120, 45Don’t Advertise45, 120100, 100
Dominant Strategy
:
The best strategy for a player regardless of the strategy followed by the other player.
Dominant Strategy for Coke … Advertise!!80 > 45 if Coke advertises … 120 > 100 if Coke does not
Slide7Another Example…
Pascal’s Wager
Slide8Nash Equilibrium
When both players follow dominant strategies
No incentive to change a decision
Not always the optimal outcome
Pepsi and Coke better off not advertising
Choose to advertise b/c of dominant strategy
Slide9Serendip Game
Slide10Small Town Gas Stations
Pam’s Pump Station
Price High
Price Low
Margaret’s
Quik-StopPrice High$80, $80$50, $100Price Low$100, $50$60, $60
Slide11How do you work together?
Formal agreements (usually illegal)
Tacit collusion
Requires multiple rounds
Follow “tit-for-tat” strategy
Reward cooperation/punish cheaters
Slide12Other Student
Take Test
Don’t Take
You
Take Test
A, FA, FDon’t TakeF, AB, B
Test Example