outline_ch09

outline_ch09 - Chapter 9: Thinking Strategically I. The...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 9: Thinking Strategically
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
I. The Theory of Games
Background image of page 2
Theory of Games Game Theory Opened up a vast new area of economic theory modeling imperfectly competitive situations involving Strategic Thinking, thinking about how to respond to how others respond to your actions. Influential in many applied areas: economic analysis of industrial organization international trade politics biology And many other areas
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Theory of Games Under perfect competition the individual buyers and sellers pursue Selfish Strategies in a market environment that is not influenced and do not react to their decisions. In most “real life” situations the buyers and sellers generally react to each others decisions. Hence, optimizing behaviour of individuals must be “Strategic” in that it must take the reactions of others into account.
Background image of page 4
Theory of Games In the following we study the efficiency properties of the outcomes of selfish and other strategies (e.g. cooperative strategies) in environments that call for strategic behaviour. We find that, unlike perfect competition, in most circumstances the outcome of selfish behaviour is not Economically Efficient from the point of view of the participants in the games (markets.)
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Why do economists study “games” ? In a perfectly competitive market, each firm takes the market price as a given. The only decision a firm can make is to decide how much to produce to maximize its profit. Because there are no future feedback effects from that decision, no strategic choices exist at the firm level.
Background image of page 6
Why do economists study “games” ? But many (most) markets are not like that If the firm’s decisions can influence the market price, the firm knows this will affect behavior of other firms – which will influence future markets The profit maximizing firm has to make Strategic Choices - i.e. the firm has to develop its strategy (choice) knowing that its competitors will respond to that choice
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The payoff of many actions depends upon the actions of others. For example, an imperfectly competitive firm must weigh the responses of rivals when deciding whether or not to change its price. Implication: decisions of competing
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 62

outline_ch09 - Chapter 9: Thinking Strategically I. The...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online