ch 9 games and strategic behavior

basic elements of a game

• the players

• their available strategies, actions, or decisions

• the payoff to each player for each possible action

dominant strategy

yields a higher payoff no matter what the other player does

basic elements of a game

• the players

• their available strategies, actions, or decisions

• the payoff to each player for each possible action

dominant strategy

yields a higher payoff no matter what the other player does

dominated strategy

any other strategy available to a player who has a dominant strategy

payoff matrix

table that describes the payoffs in a game for each possible combination of strategies

nash equilibrium

any combination of strategies in which each player’s strategy is their best choice, given the other player’s strategies

equilibrium

• occurs when each player follows their dominant strategy, if it exists

• does not require a dominant strategy

prisoner’s dilemma

a game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy

cartel

a coalition of firms that agree to restrict output to increase economic profit

• restrict total output, so prices and revenue and profits can go up

profits increase

if one firm lowers price, capture the entire market →

unstable; cheat

cartel agreements are ______ , incentive to ______

repeated prisoner’s dilemma

the same players repeatedly face the same prisoner’s dilemma

tit-for-tat strategy

my move in this round is whatever your move was in the last round

• rarely observed in the market because it breaks down with more than two players

decision tree

• when timing matters, this is a more useful way of representing payoffs

• describes the possible moves in a game in sequence

• sometimes called a game tree

credible threat

threat to take an action that is in the threatener’s best interest to carry out

credible promise

promise to take an action that is in the promiser’s best interest to carry out

commitment problem

arises from an inability to make credible threats or promises

commitment device

changes incentives to make threats or promises credible