2/04/2008
Class Notes (cover part of Chapter 12 in the textbook)
Class Outline
•
Modern approaches think of oligopoly as a game.
Def.
Game Theory
Game theory is a tool for studying strategic behavior, which is behavior that takes into
account the expected behavior of others and the mutual recognition of interdependence.
A game has three elements
:
1. Players and Rules (rules describe the setting of the game, the actions the
players may take, and the consequences of those actions)
2. Strategies: all the possible actions of each player
3. Payoffs represented in a “payoff matrix”
Def.
Payoff Matrix
A payoff matrix is a table that shows the payoffs for every possible action
by each player for every possible action by the other player.
Example:
P2
P1
High Price
Low Price
High Price
1’s
payoff
1’s
payoff
Low Price
1’s
payoff
1’s
payoff
1
2’s
payoff
2’s
payoff
2’s
payoff
2’s
payoff
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 Spring '08
 Blanchard
 Game Theory, Oligopoly

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