Game Theory and Imperfect Competition Concepts

Imperfect Competition

Competition among firms who have some market power.

Price Searchers

Firms that have the ability to set prices above marginal cost.

Strategic Behavior

Decisions made by each firm that impact the market, considering the actions of other firms.

Game Theory

How economists model strategic behavior in various contexts including international relations and business interactions.

Nash Equilibrium

Occurs when, holding the strategies of all other players constant, no player can obtain a higher payoff by choosing a different strategy.

Players

Decision Makers (Firms) in a game.

Number of Periods

Refers to whether the game is a One Period or a Repeated Game.

Order of Play

Describes whether the game is Simultaneous or Sequential.

Strategies

Possible courses of action for each player in a game.

Payoffs

Reward received by a player in a game, including all costs and benefits associated with the scenario.

Example 1

A scenario involving two firms (Firm A and Firm B) in a duopoly with simultaneous play and advertising strategies.

Example 2: Prisoner's Dilemma

A standard example in game theory illustrating the conflict between individual rationality and collective benefit.

Overcoming the Prisoner's Dilemma

Strategies or mechanisms that allow players to achieve better outcomes than the Nash Equilibrium.

Military Strategy

Strategy that depends on how enemies and allies respond, often modeled using game theory.

Trade War

A situation where countries impose tariffs or quotas on each other, analyzed through game theory.

Sports

Activities like football, baseball, tennis, and golf that can be analyzed using game theory.

Political Interactions

Decisions made in politics that depend on the actions of others, often modeled in game theory.

Social Interactions

Decisions made in social contexts that depend on the actions of friends or peers.

Mergers and Anti-Trust Laws

Regulations that govern the consolidation of companies and prevent monopolistic practices.

Market Structure

The organizational and competitive characteristics of a market, including perfect competition, monopoly, and imperfect competition.

Payoff Matrix

A table that describes the payoffs for each player in a strategic interaction.

Dominant Strategy

Strategy that gives the player a higher payoff no matter what strategy the opponent is playing.

Prisoner's Dilemma

A scenario where two players must choose to cooperate or betray each other, leading to a worse outcome if both betray.

Player A

One of the two participants in the Prisoner's Dilemma.

Player B

The second participant in the Prisoner's Dilemma.

Confess

To testify against the other prisoner in exchange for a lighter sentence.

Don't Confess

To remain silent and not testify against the other prisoner.

Payoffs (Years in Jail)

The consequences in terms of jail time based on the strategies chosen by the players.

Enforceable Contract

A legally binding agreement that ensures both parties take mutually beneficial actions.

Repeated Game

A scenario where the same game is played multiple times, allowing for potential cooperation.

Minimize Own Jail Time

The goal of each player in the Prisoner's Dilemma to reduce their own sentence.

Simultaneous Play

A situation where players make their decisions at the same time without knowing the other's choice.

Single Period

A game that is played only once.

Incentive to Choose

The motivation for players to select actions that benefit themselves.

Worst Possible Outcome

The result where both players are worse off than if they had cooperated.

Credible Strategy

A strategy that players can realistically expect to follow in a game.

Cooperation

When players work together for mutual benefit, often leading to better outcomes.

Changes the Payoffs

Adjustments in the outcomes based on the strategies or agreements made by the players.

Mutually Beneficial Action

An action that provides advantages to all parties involved.

Collectively Worse Off

A situation where all players end up with less favorable outcomes than possible.

Legal Implications

Considerations regarding the legality of actions taken in a strategic game.