Cartel Strategies and Outcomes

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Questions and Answers

What is the outcome when both firms comply in a cartel?

Each firm makes an economic profit of $4.5 million.

Each firm makes $2 million a week. (correct)

Each firm incurs an economic loss of $1 million.

Each firm makes zero economic profit.

What is the Nash equilibrium in the given scenario?

Trick complies and Gear cheats.

Both firms cheat. (correct)

Both firms comply.

Gear complies and Trick cheats.

What is used to specify all possible moves by all players and all possible outcomes and payoffs in a game?

Game tree (correct)

Payoff matrix

Nash equilibrium

Extensive form game

What is the procedure for solving a sequential-move game by starting at the end of the game tree?

Backward induction Signup and view all the answers

What type of game involves one player taking an action before another player?

Sequential move game Signup and view all the answers

What is the term for a game that can have a complex temporal structure?

Extensive form game Signup and view all the answers

What is the term for a place where players make moves in a game tree?

Node Signup and view all the answers

What is the number of terminal nodes in a game of Tic-Tac-Toe?

362,880 Signup and view all the answers

What is a condition in which a game can be viewed?

When individuals must make strategic choices Signup and view all the answers

What is a Nash equilibrium in a two-player game?

A pair of strategies where players cannot benefit by deviating Signup and view all the answers

What is a dominant strategy in a game?

A strategy that is better than any other strategy regardless of the opponent's strategy Signup and view all the answers

What is a dominated strategy in a game?

A strategy that is worse than any other strategy Signup and view all the answers

What is the purpose of identifying dominant or dominated strategies?

To eliminate unlikely strategies from consideration Signup and view all the answers

In the advertising game, what is the dominant strategy for firm B?

Lower advertising budget Signup and view all the answers

What will be the strategy choice in the advertising game?

(A: L, B: L) Signup and view all the answers

Why is a dominant strategy equilibrium considered 'likely'?

Because it is a compelling outcome Signup and view all the answers

What is the consequence of firm A adopting strategy H in the Threat Game in Advertising?

Disastrous consequences for B, with a loss of -50 or -25 Signup and view all the answers

What is the characteristic of the Rock-Scissors-Paper Game?

It has no Nash equilibrium Signup and view all the answers

What is the result of the Nash equilibrium in the Threat Game in Advertising?

A profits of +15 and B profits of +10 Signup and view all the answers

What is the definition of game theory?

A tool for studying strategic behavior Signup and view all the answers

What is the characteristic of the Stag-Hare Game?

It has multiple Nash equilibria Signup and view all the answers

What is the purpose of eliminating dominated strategies?

To reduce the game Signup and view all the answers

What is the rule of the Rock-Scissors-Paper Game?

Rock beats scissors, scissors beats paper, and paper beats rock Signup and view all the answers

What might be fostered in a game that is replayed many times?

Cooperative behavior Signup and view all the answers

Study Notes

Strategies in Cartels

Firms in a cartel can pursue two strategies: Comply or Cheat
Four possible combinations of actions for the firms:
- Both comply
- Both cheat
- Trick complies and Gear cheats
- Gear complies and Trick cheats

Possible Outcomes

If both comply, each firm makes $2 million a week
If both cheat, each firm makes zero economic profit
If Trick complies and Gear cheats, Trick incurs an economic loss of $1 million and Gear makes an economic profit of $4.5 million
If Gear complies and Trick cheats, Gear incurs an economic loss of $1 million and Trick makes an economic profit of $4.5 million

Nash Equilibrium

The Nash equilibrium is that both firms cheat
The quantity and price are those of a competitive market, and the firms make zero economic profit

Sequential Move Games

Games in which one player (the first mover) takes an action before another player (the second mover)
The second mover observes the action taken by the first mover before deciding what action it should take
Game Trees are commonly used to specify all possible moves by all players and all possible outcomes and payoffs

Dominated Strategy

A dominated strategy is a strategy that gives a lower payoff than another strategy, regardless of the opponent's action
By eliminating the dominated strategies, we can reduce the game
Example: "Build Large" is dominated for each player in the Toyota-Honda game

Rock-Scissors-Paper Game

A game with no Nash equilibrium
Any strategy pair is unstable since it offers at least one of the players an incentive to adopt another strategy

Stag-Hare Game

A game with multiple Nash equilibria
Two Nash equilibria: (Stag, stag) and (Hare, Hare)

A Threat Game in Advertising

A game where the adoption of strategy H by firm A has disastrous consequences for B
The Nash equilibrium is (A: L, B: H) without communication
However, A might threaten to use strategy H unless B plays L to increase profits

Game Theory

A tool for studying strategic behavior
Takes into account the expected behavior of others and the mutual recognition of interdependence
Games can be characterized by "tacit collusion" although firms never meet

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Description

This quiz explores the possible strategies and outcomes of firms in a cartel, including complying and cheating, and their resulting economic profits.