Game Theory
What a "Game" means in Game Theory.
Rivalry is direct.
In "Zero-Sum" games you win just what
the other guy loses.
Economic market games are often non-zero sum.
Noncooperative often.
Oligopolistic.
Who needs to study Game Theory?
We will do two-person games in this
course.
Barkley
Strategy 1
Strategy
A
Allied
Strategy
B
Ba rkley's Profit
$4 m illion
Allied's profit
$3 million
Barkley's profit
$3 million
Allied's profit
$4 million
Strategy 2
Barkley's profit
$3 million
Allied's profit
$2 million
Barkley's profit
$2 million
Allied' s profit
$3 million
Payoff Matrix R and D Programs
Nash Equilibrium:
A set of strategies such that each player
believes accurately that he is doing the
best he can given the strategy of the
other player.
The book and the
Oscar-winning movie.
Nash as a
young man
Nash as a Nobel
Prize Winner
Barkley
Strategy 1
Strategy
A
Allied
Strategy
B
Barkley's Profit
$4 million
Allied's profit
$3 million
Barkley's profit
$3 million
Allied's profit
$4 million
Strategy 2
Barkley's profit
$3 million
Allied's profit
$2 million
Barkley's profit
$4 million
Allied' s profit
$3 million
Pa yoff Ma trix: No Domina nt
Stra tegy for Ba rkley
Cournot Oligopoly:
This historical first oligopoly
model has the nature of a
modern game theoretic game.
Pric e
Dem and c urve if Hanover
produces zero units.
Marginal
cost
Marginal revenue
Quantity
150
Cournot Duopoly example: Carpenter & Hannover
Price
If Carpenter believes that Hanover
will produce 100 units.
Dem and c urve if Hanover
still actually produces zero units.
Marginal
cost
Dem and if Hanover were to
produc e 100 units
Marginal revenue
Quantity
100
Hypothetical: Hannover increases to 100 units.
Price
If Carpenter believes that Hanover
will produce 200 units.
Dem and c urve if Hanover
still actually produces zero units.
Marginal
cost
Dem and if Hanover were to
produc e 200 units
Marginal revenue
Quantity
50
Hypothetical: Hannover produces 200 units.
Carpenter's
output (units
per month)
200
Hannover's Reaction
Curve
.Equilibrium
100
.
Carpenter's
Reaction curve
.
.
0
100
Hannover's
output (units
200 per month)
Reaction Curves for Hannover & Carpenter
Applications of Game Theory outside
of economics:
Prisoner's Dilemma
MAD our historical Cold War policy
on nuclear attack missiles and our
defensive system.
Does Cheating Pay?
Most-favored Customer Policies.
Before Most-favored Customer Clause
After Most-Favored Customer Clause
Lecture and discussion topics:
Oligopolistic Rivalry
The Importance of Commitment
Preempting Potential Rivals
When Is A Threat Credible?
The Importance of Entry
Deterring Entry.
(DuPont Case discussion)
Advertising to Resist Entry
(Folgers Case discussion)
Preemptive Strategies:
(Wal-Mart Case next slide)
Walmart Case: Preemptive strategies.