Learning Objectives
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# Learning Objectives - Model strategic interactions using game theory - Find Nash equilibria in normal-form games - Apply game theory to oligopoly and business strategy - Week 4: Oligopoly market structure - Basic logic and reasoning skills ## 1. Introduction to Game Theory **Intuition:** In oligopoly, your best mo...
Learning Objectives
- Model strategic interactions using game theory
- Find Nash equilibria in normal-form games
- Apply game theory to oligopoly and business strategy
- Week 4: Oligopoly market structure
- Basic logic and reasoning skills
1. Introduction to Game Theory
Intuition: In oligopoly, your best move depends on what competitors do. Game theory models these strategic interactions.
Elements of a Game:
- Players (firms, individuals)
- Strategies (actions available)
- Payoffs (profits, outcomes)
2. The Prisoner's Dilemma
| Confess | Stay Silent | |
|---|---|---|
| Confess | (-5, -5) | (0, -10) |
| Stay Silent | (-10, 0) | (-1, -1) |
Nash Equilibrium: (Confess, Confess) - both confess, even though both would be better off silent.
3. Nash Equilibrium
Each player's strategy is a best response to the other's. No player has incentive to unilaterally deviate.
4. Applications to Oligopoly
Cournot Competition: Firms choose quantities simultaneously. Bertrand Competition: Firms choose prices simultaneously. Collusion: Firms cooperate (illegal in many cases) to act like a monopoly.
| Concept | Description | Example |
|---|---|---|
| Dominant Strategy | Best regardless of opponent's move | Confess in PD |
| Nash Equilibrium | Mutual best responses | Cournot duopoly |
| Collusion | Cooperative agreement | OPEC oil production |
Q1: In prisoner's dilemma, why is (confess, confess) the equilibrium?Confessing is a dominant strategy for both players - each gets a better outcome by confessing regardless of the other's choice. Q2: What is the difference between Cournot and Bertrand competition?Cournot: firms compete on quantity. Bertrand: firms compete on price. Bertrand leads to P=MC (perfect competition outcome) with 2 firms. Q3: Why is collusion unstable?Each firm has incentive to cheat on the agreement (produce more or undercut price) to increase its own profit. Join Discord PreviousPricing StrategiesNextDecision Making Under Uncertainty