Managerial Economics Business strategy Chapter 10 Game Theory: Inside oligopoly Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 10 Game Theory: Inside Oligopoly
Overview I. Introduction to Game Theory I. Simultaneous-Move One-Shot Games III. Infinitely Repeated Games IV. Finitely repeated games V. Multistage Games Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview I. Introduction to Game Theory II. Simultaneous-Move, One-Shot Games III. Infinitely Repeated Games IV. Finitely Repeated Games V. Multistage Games
Normal form game a normal form game consists of Players Strategies or feasible actions ■ Payoffs Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Normal Form Game • A Normal Form Game consists of: Players Strategies or feasible actions Payoffs
A normal form game Player 2 Strategy A B C 12.11 11.12 14.13 abc 11.10 10.11 12.12 10.15 10.13 13.14 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 A Normal Form Game Strategy A B C a b c Player 2 Player 1 12,11 11,12 14,13 11,10 10,11 12,12 10,15 10,13 13,14
Normal form game Scenario analvsis Suppose 1 thinks 2 will chooseA Player 2 Strategy A B C a 11.12 14.13 b 11.10 10 12.12 C 10.15 10.13 13.14 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Normal Form Game: Scenario Analysis • Suppose 1 thinks 2 will choose “A”. Strategy A B C a b c Player 2 Player 1 12,11 11,12 14,13 11,10 10,11 12,12 10,15 10,13 13,14
Normal form game. Scenario analysis Then 1 should choosea a Player 1s best response to "Ais a Player 2 Strate A B C a 14.13 11.10 10.11 12.12 10.15 10.13 13.14 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Normal Form Game: Scenario Analysis • Then 1 should choose “a”. Player 1’s best response to “A” is “a”. Strategy A B C a b c Player 2 Player 1 12,11 11,12 14,13 11,10 10,11 12,12 10,15 10,13 13,14
Normal form game Scenario Analysis Suppose 1 thinks 2 will choose"B Player 2 Strategy A B C 11.12 14.13 abc 11.10 10 12.12 10.15 10.13 13.14 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Normal Form Game: Scenario Analysis • Suppose 1 thinks 2 will choose “B”. Strategy A B C a b c Player 2 Player 1 12,11 11,12 14,13 11,10 10,11 12,12 10,15 10,13 13,14
Normal form game Scenario Analysis Then 1 should choose“a Player 1s best response to "Bisa Player 2 Strate A B C a 12.11 14.13 b 11.10 10.11 12.12 C 10.15 10.13 13.14 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Normal Form Game: Scenario Analysis • Then 1 should choose “a”. Player 1’s best response to “B” is “a”. Strategy A B C a b c Player 2 Player 1 12,11 11,12 14,13 11,10 10,11 12,12 10,15 10,13 13,14
Normal form game Scenario Analysis Similarly, if 1 thinks 2 will choose C Player Is best response to"a Player 2 Strateg A B C 12.11 11.1 14,13 abc 1110 10. 12.12 10.15 10.13 13.14 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Normal Form Game Scenario Analysis • Similarly, if 1 thinks 2 will choose C… Player 1’s best response to “C” is “a”. Strategy A B C a b c Player 2 Player 1 12,11 11,12 14,13 11,10 10,11 12,12 10,15 10,13 13,14
Dominant Strategy Regardless of whether Player 2 chooses A, b, or C, Player 1 is better off choosing a'! a' is player 1s dominant strategy! Player 2 Strategy B C 14.13 abc 11.10 10.11 12.12 10.15 10.13 13.14 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Dominant Strategy • Regardless of whether Player 2 chooses A, B, or C, Player 1 is better off choosing “a”! • “a” is Player 1’s Dominant Strategy! Strategy A B C a b c Player 2 Player 1 12,11 11,12 14,13 11,10 10,11 12,12 10,15 10,13 13,14
