outline17 - Economics 103 Lecture # 17 Interaction Among...

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Economics 103 Lecture # 17 Interaction Among the Few
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To this point we’ve assumed: 1. Firms were so small relative to the market they could ignore other firms. 2. Firms were simple price takers and didn’t need to take into account the actions of others. But in many situations in life, we strategically interact with others.
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A few other examples:
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There is a language to talk about these situations: Game Theory. Strategy : the margin you make a decision on: up/down, price, etc. Pay-off : the reward: profit/utility Best Response : the best strategy, given the strategy of others. Nash Equilibrium : when everyone’s best strategy is the BR to the strategies of all the players. Dominant Strategy : always the best strategy, regardless of the strategies of the others. Common Knowledge: I know what you know, you know I know what you know, I know you know I know what you know …. -the princess bride.
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Let’s start with games of dominant strategies.
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outline17 - Economics 103 Lecture # 17 Interaction Among...

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