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Learning Objectives

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Now · 1. Introduction to Game Theory

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