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Game Theory
What a "Game" means in Game Theory.
Rivalry is direct. In "Zero-Sum" games you win just what the other guy loses. Economic market games are often non-zero sum. Noncooperative often. Oligopolistic.
Who needs to study Game Theory?
We will do two-person games in this course.
Pa yoff M a trix R a nd D Pro g ra m s
Ba rkle y's Pro fit $4 m illion
Ba rkley's p rofit $3 m illion
Ba rkley's p rofit $3 m illion
Ba rkley's p rofit $2 m illion
Allied 's p rofit $3 m illio n
Allied 's p rofit $2 m illio n
Allied 's p rofit$4 m illio n
Allied ' s p rofit $3 m illio n
Stra te g y 1 Stra te g y 2
Ba rkle y
Stra te g y A
Stra te g y B
Allie d
Nash Equilibrium:
A set of strategies such that each player believes accurately that he is doing the best he can given the strategy of the other player.
Nash as a young man
Nash as a Nobel Prize Winner
The book and the Oscar-winning movie.
Ba rkley's Profit $4 m illion
Ba rkley's p rofit $3 m illion
Ba rkley's p rofit $3 m illion
Ba rkley's p rofit $4 m illion
Allied 's p rofit $3 m illio n
Allied 's p rofit $2 m illio n
Allied 's p rofit$4 m illio n
Allied ' s p rofit $3 m illio n
Stra te g y 1 Stra te g y 2
Ba rkle y
Stra te g y A
Stra te g y B
Allie d
Pa yo ff M a trix: No Dom ina nt Stra teg y fo r Ba rkle y
Cournot Oligopoly:
This historical first oligopoly model has the nature of a modern game theoretic game.
De m a nd c urve if Ha no ve r p ro d uc e s ze ro units.
M a rg ina l re ve nue
M a rg ina lc o st
Pric e
Q ua ntity150
Cournot Duopoly example: Carpenter & Hannover
De m a nd c urve if Ha no ve r still a c tua lly p ro d uc e s ze ro units.
M a rg ina l re ve nue
M a rg ina lc o st
Pric e
Q ua ntity
10 0
If C a rp e nte r b e lie ve s th a t Ha no ve r w ill p ro d u c e 100 units.
De m a nd if Ha no ve r we re to p ro d uc e 100 units
Hypothetical: Hannover increases to 100 units.
De m a nd c urve if Ha no ve r still a c tua lly p ro d uc e s ze ro units.
M a rg ina l re ve nue
M a rg ina lc o st
Pric e
Q ua ntity50
If C a rp e nte r b e lie ve s th a t Ha no ve r w ill p ro d u c e 200 units.
De m a nd if Ha no ve r we re to p ro d uc e 200 units
Hypothetical: Hannover produces 200 units.
Ha nno ve r's Re a c tio n C urve
Eq uilib rium
C a rp e n te r'sRe a c tio n c u rve
Ha nno ve r'so u tp u t (un itsp e r m o nth)
C a rp e n te r'so u tp u t (un its p e r m o nth)
0 100
100
200
200
..
. .
Reaction Curves for Hannover & Carpenter
Applications of Game Theory outside of economics:
Prisoner's Dilemma MAD our historical Cold War policy on nuclear attack missiles and our defensive system.
Does Cheating Pay?
Most-favored Customer Policies.
Before Most-favored Customer Clause
After Most-Favored Customer Clause
Lecture and discussion topics:
Oligopolistic Rivalry
The Importance of Commitment
Preempting Potential Rivals
When Is A Threat Credible?
The Importance of Entry
Deterring Entry. (DuPont Case discussion)
Advertising to Resist Entry (Folgers Case discussion)
Preemptive Strategies: (Wal-Mart Case next slide)
Walmart Case: Preemptive strategies.
