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Questions and Answers
What is a key aspect of game theory?
What are the three essential components of games?
What is a Nash equilibrium?
What is a characteristic of simultaneous games?
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What is the purpose of game trees in sequential games?
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What is a key feature of repeated games?
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What is the main concern in oligopoly markets?
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What is the purpose of regulatory bodies in combating cartels?
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What is a consequence of dominant strategy equilibrium in simultaneous games?
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What is necessary for the sustainability of collusion in oligopoly markets?
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Study Notes
Understanding Game Theory
- Game theory analyzes scenarios where one player's outcomes depend on their actions and those of others.
- It is a powerful tool for understanding various economic dynamics, such as pollution, sports, and marketing.
Key Elements of Games
- Games involve players, strategies, and payoffs.
- Players make choices based on available strategies, resulting in payoffs determined by their actions and those of others.
Nash Equilibrium
- Nash equilibrium occurs when each player's strategy is optimal, given the strategies of others.
- It relies on mutual understanding of the game and payoffs, emphasizing rational decision-making.
Types of Games
Simultaneous Games
- Players make decisions simultaneously, without knowledge of others' choices.
- Dominant strategy equilibrium can lead to suboptimal outcomes, as seen in the classic example of the Prisoners' Dilemma.
Sequential Games
- In sequential games, players act in sequence, knowing preceding actions.
- Game trees illustrate decision pathways.
- Sub-game perfect equilibrium emerges, wherein players make optimal moves at each stage.
Repeated Games
- Games can be played repeatedly, influencing strategic choices.
- Oligopoly markets, akin to prisoner's dilemmas, highlight the tension between cooperation and self-interest.
Policy Response to Oligopolies
- Cartels, illegal under competition law, distort markets by fixing prices and limiting competition.
- Regulatory bodies like the EU Commission combat cartels through fines and leniency policies, aiming to promote fair competition.
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Description
Introduction to Game Theory, a tool for understanding strategy and outcomes in scenarios involving multiple players and actions.
