Module
Micro: 29
Econ: 65
Game Theory
KRUGMAN'S
MICROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How oligopoly can be analyzed using
game theory.
• The concept of the prisoners’ dilemma.
• How repeated interactions among
oligopolists can result in collusion in the
absence of any formal agreement.
Game Theory
• Game Theory: study of
how interdependent
decision makers make
choices.
Non-Cooperative Games
• Each player competes
to maximize individual
payoffs and ignores the
effects of his/her action
on the payoffs received
by the rival.
Terms to Know
• Payoff matrix
• Dominant strategy
• Nash equilibrium
Prisoner’s Dilemma
• Each player has an
incentive to choose
an action that
benefits his/herself at
the other player’s
expense.
• Both players are then
worse off than if they
had acted
cooperatively.
The payoff matrix below summarizes the
strategies and outcomes. The payoffs are
measured as years in prison, so smaller
numbers are preferred.
Crook 2
Crook 1 Confess
Silent
Confess
Silent
#1: 5 years
#2: 5 years
#1: 1 year
#2: 20 years
#1: 20 years #1: 2 years
#2: 1 year
#2: 2 years
Repeated Interaction and
Tacit Collusion
• Repeated interaction can lead to strategic
behavior
• Tit for tat strategy
• Tacit Collusion