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.

Pa yoff M a trix R a nd D Pro g ra m s

Ba rkle y's Pro fit $4 m illion

Ba rkley's p rofit $3 m illion

Ba rkley's p rofit $3 m illion

Ba rkley's p rofit $2 m illion

Allied 's p rofit $3 m illio n

Allied 's p rofit $2 m illio n

Allied 's p rofit$4 m illio n

Allied ' s p rofit $3 m illio n

Stra te g y 1 Stra te g y 2

Ba rkle y

Stra te g y A

Stra te g y B

Allie d

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.

Nash as a young man

Nash as a Nobel Prize Winner

The book and the Oscar-winning movie.

Ba rkley's Profit $4 m illion

Ba rkley's p rofit $3 m illion

Ba rkley's p rofit $3 m illion

Ba rkley's p rofit $4 m illion

Allied 's p rofit $3 m illio n

Allied 's p rofit $2 m illio n

Allied 's p rofit$4 m illio n

Allied ' s p rofit $3 m illio n

Stra te g y 1 Stra te g y 2

Ba rkle y

Stra te g y A

Stra te g y B

Allie d

Pa yo ff M a trix: No Dom ina nt Stra teg y fo r Ba rkle y

Cournot Oligopoly:

This historical first oligopoly model has the nature of a modern game theoretic game.

De m a nd c urve if Ha no ve r p ro d uc e s ze ro units.

M a rg ina l re ve nue

M a rg ina lc o st

Pric e

Q ua ntity150

Cournot Duopoly example: Carpenter & Hannover

De m a nd c urve if Ha no ve r still a c tua lly p ro d uc e s ze ro units.

M a rg ina l re ve nue

M a rg ina lc o st

Pric e

Q ua ntity

10 0

If C a rp e nte r b e lie ve s th a t Ha no ve r w ill p ro d u c e 100 units.

De m a nd if Ha no ve r we re to p ro d uc e 100 units

Hypothetical: Hannover increases to 100 units.

De m a nd c urve if Ha no ve r still a c tua lly p ro d uc e s ze ro units.

M a rg ina l re ve nue

M a rg ina lc o st

Pric e

Q ua ntity50

If C a rp e nte r b e lie ve s th a t Ha no ve r w ill p ro d u c e 200 units.

De m a nd if Ha no ve r we re to p ro d uc e 200 units

Hypothetical: Hannover produces 200 units.

Ha nno ve r's Re a c tio n C urve

Eq uilib rium

C a rp e n te r'sRe a c tio n c u rve

Ha nno ve r'so u tp u t (un itsp e r m o nth)

C a rp e n te r'so u tp u t (un its p e r m o nth)

0 100

100

200

200

..

. .

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.