Chapter 14 - Game theory and strategic behavior. This chapter presents the following content: Motivation: Honda and Toyota, nash equilibrium, the prisoner's dilemma, dominant strategy equilibrium, limitations of the nash equilibrium, sequential moves games. | 1 Game Theory and Strategic Behavior Chapter 14 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Fourteen Overview Motivation: Honda and Toyota Nash Equilibrium The Prisoner's Dilemma Dominant Strategy Equilibrium Limitations of the Nash Equilibrium Sequential Moves Games The Value of Limiting One’s Opinion Chapter Fourteen Copyright (c)2014 John Wiley & Sons, Inc. 3 Honda Toyota Chapter Fourteen Capacity Expansion Game What is the likely outcome of this game? Copyright (c)2014 John Wiley & Sons, Inc. 4 Chapter Fourteen Capacity Expansion Game Game Elements Players: agents participating in the game (Toyota, Honda) Strategies: Actions that each player may take under any possible circumstance (Build, Don't build) Outcomes: The various possible results of the game (four, each represented by one cell of matrix) Payoffs: The benefit that each player gets from each possible outcome of the game (the profits entered in each cell of the matrix) Copyright (c)2014 John Wiley & Sons, Inc. 5 | 1 Game Theory and Strategic Behavior Chapter 14 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Fourteen Overview Motivation: Honda and Toyota Nash Equilibrium The Prisoner's Dilemma Dominant Strategy Equilibrium Limitations of the Nash Equilibrium Sequential Moves Games The Value of Limiting One’s Opinion Chapter Fourteen Copyright (c)2014 John Wiley & Sons, Inc. 3 Honda Toyota Chapter Fourteen Capacity Expansion Game What is the likely outcome of this game? Copyright (c)2014 John Wiley & Sons, Inc. 4 Chapter Fourteen Capacity Expansion Game Game Elements Players: agents participating in the game (Toyota, Honda) Strategies: Actions that each player may take under any possible circumstance (Build, Don't build) Outcomes: The various possible results of the game (four, each represented by one cell of matrix) Payoffs: The benefit that each player gets from each possible outcome of the game (the profits entered in each cell of the matrix) Copyright (c)2014 John Wiley & Sons, Inc. 5 Chapter Fourteen Capacity Expansion Game Information: A full specification of who knows what when (full information) Timing: Who can take what decision when and how often the game is repeated (simultaneous, one-shot) Solution concept of the game: "What is the likely outcome"? (Dominant Strategy Equilibrium, Nash Equilibrium) Copyright (c)2014 John Wiley & Sons, Inc. 6 Chapter Fourteen Nash Equilibrium Definition: A Nash Equilibrium occurs when each player chooses a strategy that gives him/her the highest payoff, given the strategy chosen by the other player(s) in the game. ("rational self-interest") Toyota vs. Honda: A Nash equilibrium: Each Firm Builds a New Plant Copyright (c)2014 John Wiley & Sons, Inc. 7 Chapter Fourteen Nash Equilibrium Given Toyota builds a new plant, Honda's best response is to build a new plant. Given Honda builds a new plant, Toyota's best response is to build a plant. Why is the Nash Equilibrium plausible? It IS "self enforcing” Even though it DOES NOT .
