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GAME THEORY AND OLIGOPOLY. Principles of Microeconomic Theory, ECO 284 John Eastwood CBA 247 523-7353 e-mail address: John.Eastwood@nau.edu. What is Game Theory?.
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GAME THEORY AND OLIGOPOLY • Principles of Microeconomic Theory, ECO 284 • John Eastwood • CBA 247 • 523-7353 • e-mail address: John.Eastwood@nau.edu
What is Game Theory? • Game Theory is a field of mathematics first developed by John Von Neumann, and Oskar Morgenstern (Theory of Games and Economic Behavior).
Payoff Matrix • Two players, each may choose between two strategies. There are four possible mutually exclusive outcomes. • Matrix shows the payoff to each player. • If Jill (x) holds out, & Jack (y) confesses, the payoff,(x,y) = (-6,0), means Jill gets 6 years, and Jack goes free.
Strategy, Outcomes & Equilibria • A dominant strategy is a player’s best response to any strategy other players might pick • A Nash equilibrium is an outcome that is stable once reached. No player has an incentive to change strategy unless other players change.
Terminology • In a cooperative game, players may make binding agreements, or form coalitions. • In a noncooperative game, players may neither make binding agreements, nor form coalitions. • A zero-sum game is one in which one player may gain only what others lose; poker is an example.
More terminology • The Prisoners’ Dilemma is a non-cooperative, nonzero sum game. • Whether Jack or Jill moves first is unimportant. • Moving first is advantageous in many other games.
Dynamic Games • Grim strategy -- refusal to commit to a position until the other player commits to a position. • A tit-for-tat strategy begins cooperatively, and then echo what the opponent did in the previous period
Other Strategies • A player who follows the Trigger Strategy cooperates as long as the other player cooperates, but adopts the most extreme form of punishment possible if their agreement is broken. • Reputation building: Players gain a reputation through consistent behavior for several rounds of the game.
Predatory Behavior • Predatory behavior occurs when a firm attempts to drive rivals from the industry and deter entry. • The predator sets P < ATC, while producing the quantity demanded. • If all rivals shut down to reduce their SR losses AND exit in the LR, the predator monopolizes the market.
Strategic BTE, Predation and Accommodation • Strategic BTE may be viewed as predatory weapons. • Less costly to acquire your rival? • Accommodation: Allowing a rival to enter (or survive) may be less costly.
