This chapter focuses on game theory and applies this tool to monopolistic competition and oligopoly. This is the second of two chapters on imperfect competition and continues the discussion of this topic begun in Chapter 8. | Games and Strategic Behavior Chapter 9 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. 1 1 Learning Objectives List the three basic elements of a game. Recognize and discuss the effects of dominant strategies and dominated strategies Identify and explain the prisoner's dilemma and how it applies to real-world situations Explain games in which the timing of players' choices matter Discuss strategies that enable players to reap gains through cooperation 2 2 Strategies and Payoffs Actions have payoffs that depend on: The actions When they are taken The actions of others Some markets are characterized by interdependence Apply to monopolistic competition and oligopoly 3 3 Game Theory Basic elements of a game: The players Their available strategies, actions, or decisions The payoff to each player for each possible action A dominant strategy is one that yields a higher payoff no matter what the other player does A dominated strategy is any other . | Games and Strategic Behavior Chapter 9 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. 1 1 Learning Objectives List the three basic elements of a game. Recognize and discuss the effects of dominant strategies and dominated strategies Identify and explain the prisoner's dilemma and how it applies to real-world situations Explain games in which the timing of players' choices matter Discuss strategies that enable players to reap gains through cooperation 2 2 Strategies and Payoffs Actions have payoffs that depend on: The actions When they are taken The actions of others Some markets are characterized by interdependence Apply to monopolistic competition and oligopoly 3 3 Game Theory Basic elements of a game: The players Their available strategies, actions, or decisions The payoff to each player for each possible action A dominant strategy is one that yields a higher payoff no matter what the other player does A dominated strategy is any other strategy available to a player who has a dominant strategy 4 4 Singapore and Thai – Scenario 1 Players: Singapore Airlines and Thai Airways supplying service between Singapore and Bangkok No other carriers Strategies: Increase advertising by $1,000 or not Assumption: all payoffs are know to all parties A payoff matrix is a table that describes the payoffs in a game for each possible combination of strategies 5 5 Payoff Matrix Payoff is symmetric Dominant strategy is raise advertising spending Both companies are worse off Thai Airways Options Singapore Airlines Options Raise Spending No Raise Raise Spending Singapore: $5,500 Thai: $5,500 Singapore: $8,000 Thai: $2,000 No Raise Singapore: $2,000 Thai: $8,000 Singapore: $6,000 Thai: $6,000 6 6 Equilibrium in a Game A Nash equilibrium is any combination of strategies in which each player’s strategy is her or his best choice, given the other player’s strategies Equilibrium occurs when each player follows his dominant strategy, if it exists .
