2017sp-ec201-lec16-05-30.pptx

# 2017sp-ec201-lec16-05-30.pptx - Lecture Code Game Theory...

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Game Theory and Oligopoly Professor Keaton Miller Office: 535 PLC Hours: 1:30 – 3:30 PM on Tuesday E-mail: [email protected] Lecture Code:

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Announcements HW 7 due tonight! Last homework is due next Thursday (not Tuesday) at 11:45 PM.
The Prisoner’s Dilemma Robinson

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Nash Eq. of the Prisoner’s Dilemma This equilibrium is particularly compelling because it is special. Each choice made is a Dominant Strategy Optimal regardless of what the other person does What is the efficiency of this outcome? Eq outcome: both confess, each gets 8 years in jail If instead, neither confess, each gets only one year in jail Point: If players could cooperate (somehow commit to not confessing), both parties would be better off!
Another famous game: Bach or Stravinsky Partner A Partner B Meet at Bach Meet at Stravinsky Meet at Bach Meet at Stravinsky A gets 1 A gets 0 A gets 0 A gets 3 B gets 3 B gets 0 B gets 0 B gets 1

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In BoS, players make their choice simultaneously What are the incentives for Partner A? What are the incentives for Partner B? What are the Nash Equilibria of this simultaneous-move game?
What happens if action is sequential ? Partner A moves first. Sends text message to Partner B about their decision. Then Partner B moves. What is the equilibrium outcome now if the Partner B optimizes given Partner A’s choice?

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What happens if action is sequential ? Partner A moves first. Sends text message to Partner B about their decision. Then Partner B moves. What is the equilibrium outcome now if the Partner B rationally optimizes given Partner A’s choice? First mover advantage!
One more change… Like above, A picks show before B, and sends text message to B, after picking their show.. But before A picks their show, B can make a deal with all their friends that if any of them hears that they went to Stravinsky, they all will unfollow them on Instagram . Suppose partner B really likes having Instagram followers, and if they are defriended by everyone they suffer a loss of 10 . What do the payoffs look like now?

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Bach or Stravinsky with the Instagram deal Partner A Partner B Meet at Bach Meet at Stravinsky Meet at Bach Meet at Stravinsky A gets 1 A gets 0 A gets 0 A gets 3 B gets 3 B gets 0 B gets -10 B gets -9
Solving via backward induction Assume: each player is forward looking and assumes the other player will play rationally Need to work backward and look at the endgame first If deal with friends, regardless of A’s choice, B will choose…? Anticipating B’s behavior, A will choose…? So will B make the deal?

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Solving via backward induction Assume: each player is forward looking and assumes the other player will play rationally Need to work backward and look at the endgame first If deal with friends, regardless of A’s choice, B will choose…?
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