ECON1101 - Game Theory

Game Theory

Game Theory
The study of the behaviour of decision makers, whose decisions affect eachother.

Factors

  • Players
  • Possible Actions
  • Payoffs

Strategies

Dominant Strategy

A strategy that gives a player a higher payoff no matter what the other players choose.

Dominated Strategy

A strategy that gives a player a lower payoff no matter what the other players choose.

Nash Equilibrium

A set of strategies in which every player's strategy is their best choice based on the other player's strategies. Hence no player wants to switch strategies.

The Nash Equilibrium is not always pareto efficient, as there may be situations where a different strategy could improve one player's payoff without making any other player worse off. This is as different choices affect each other player, but every player is concerned only with their own payoff, without thinking of other player's.

The Prisoner's Dilemma

A game in which each player has a dominant strategy, but each player would be better off playing their dominated strategy.

Cartel Agreements

A Cartel
A group of competing firms that coordinate production and pricing decisions in order to earn an economic profit.

Cartel's are unstable as charging a price below the monopoly price is always a dominant strategy for a firm.

They're able to exist because of:

  • Repeated games
  • Visibility of actions
  • Ability to punish non-cooperation