24 Questions
What is the outcome when both firms comply in a cartel?
Each firm makes $2 million a week.
What is the Nash equilibrium in the given scenario?
Both firms cheat.
What is used to specify all possible moves by all players and all possible outcomes and payoffs in a game?
Game tree
What is the procedure for solving a sequential-move game by starting at the end of the game tree?
Backward induction
What type of game involves one player taking an action before another player?
Sequential move game
What is the term for a game that can have a complex temporal structure?
Extensive form game
What is the term for a place where players make moves in a game tree?
Node
What is the number of terminal nodes in a game of Tic-Tac-Toe?
362,880
What is a condition in which a game can be viewed?
When individuals must make strategic choices
What is a Nash equilibrium in a two-player game?
A pair of strategies where players cannot benefit by deviating
What is a dominant strategy in a game?
A strategy that is better than any other strategy regardless of the opponent's strategy
What is a dominated strategy in a game?
A strategy that is worse than any other strategy
What is the purpose of identifying dominant or dominated strategies?
To eliminate unlikely strategies from consideration
In the advertising game, what is the dominant strategy for firm B?
Lower advertising budget
What will be the strategy choice in the advertising game?
(A: L, B: L)
Why is a dominant strategy equilibrium considered 'likely'?
Because it is a compelling outcome
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
What is the characteristic of the Rock-Scissors-Paper Game?
It has no Nash equilibrium
What is the result of the Nash equilibrium in the Threat Game in Advertising?
A profits of +15 and B profits of +10
What is the definition of game theory?
A tool for studying strategic behavior
What is the characteristic of the Stag-Hare Game?
It has multiple Nash equilibria
What is the purpose of eliminating dominated strategies?
To reduce the game
What is the rule of the Rock-Scissors-Paper Game?
Rock beats scissors, scissors beats paper, and paper beats rock
What might be fostered in a game that is replayed many times?
Cooperative behavior
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
This quiz explores the possible strategies and outcomes of firms in a cartel, including complying and cheating, and their resulting economic profits.
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