nlecture19 - game theory - slides

nlecture19 - game theory - slides - 4/4/2009 Topic 8:...

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4/4/2009 1 Topic 8: Introduction to Game Theory USC Marshal Introduction to game theory • How do we solve models where what I would like to do depends on what other people will do? • We use game theory and the concept of Nash equilibrium USC Marshal – Key building block in modern microeconomics and in the analysis of imperfect competition • Firms choosing prices, output, advertising, investment levels,… Introduction to game theory Describing a game: – The set of players: • Sony, Microsoft and Nintendo • Helen and Tom – The actions (strategies) available to the players USC Marshal • Price, product design,… • Rock, paper, scissors – Payoffs realized by the players, given any combination of actions
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4/4/2009 2 Introduction to game theory • Types of games: – Games with simultaneous moves – Games with sequential moves – Repeated games USC Marshal Games with simultaneous moves Example 1: Co-operating on a joint term project – Helen and Tom need to complete a joint course project. If they both put in effort, they are guaranteed to get an A. If only one puts in effort, they get a B and if neither puts in effort they get a USC Marshal they get a B and if neither puts in effort, they get a C. Assume that for both Helen and Tom, A is worth 30, B is worth 20 and C is worth 10. Putting in effort costs 11. Tom Effort No effort Helen Effort 19,19 9,20 No effort 20,9 10,10 Games with simultaneous moves Example 1: Effort No effort Helen Effort 19,19 9,20 No effort 20,9 10,10 USC Marshal – What is the outcome of this game? – How do we get there?
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4/4/2009 3 Games with simultaneous moves Example 1: Tom Effort No effort Helen Effort 19,19 9,20 No effort 20,9 10,10 USC Marshal – Consider Tom: No matter what Helen does, Tom is better off putting in no effort • 20>19 and 10>9 – Similarly for Helen • Each chooses to put in no effort Games with simultaneous moves Example 2: Two people accused of a crime they committed together are held in separate interrogation rooms. If neither of them confesses, they can be convicted only of a minor crime and get 2 months in jail. If one confesses, the prosecutor cuts a deal reducing his sentence USC Marshal prosecutor cuts a deal, reducing his sentence down to 1 month while the other gets the full sentence of 5 months. Finally, if both confess, they each get 5 months in jail Games with simultaneous moves Example 2: Accused B Confess Don’t confess Accused A Confess -5,-5 -1,-5 Don’t confess -5,-1 -2,-2 USC Marshal – What is the equilibrium outcome of this game?
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4/4/2009 4 Games with simultaneous moves Example 3 : Two firms producing substitute
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This note was uploaded on 04/21/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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nlecture19 - game theory - slides - 4/4/2009 Topic 8:...

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