Intro to Game Theory - <> Monopoly Under perfect competition each producer is too small to significantly affect any other producer so a producer

UNC-Wilmington ECN 321 Department of Economics and Finance Dr. Chris Dumas Introduction to Game Theory Brief History 1939-1945 World War II creates need for methods to improve strategies 1943 John von-Neumann & Oskar Morgenstern Mathematician & Economist “Theory of Games and Economic Behavior” – very technical 1950 Albert Tucker sociologist “Prisoners’ Dilemma” concept & Market Failure 1951 John Nash “Nash Equilibrium” concept (Nobel Prize 1994) “Non-Cooperative Solution” often inefficient relative to cooperative solution 1960 Thomas Schelling “The Strategy of Conflict” widely-read, non-technical book on applications of game theory to Business & Diplomacy 1970’s Cooperative Solutions -- Biology, Economics, Evolution, Clubs, Firms 1980’s—1990’s Application of game theory in economics grows tremendously In Economics, Game Theory handles situations between Perfect Comp. and Monopoly Perfect Competition <-----> Game Theory

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Unformatted text preview: <------> Monopoly Under perfect competition, each producer is too small to significantly affect any other producer, so a producer doesn’t need to form a strategy about how to respond to changes in the behavior of any other particular producer. Under monopoly, there is only one producer. The monopoly doesn’t need to form a strategy about how to respond to changes in the behavior of other producers, because there aren’t any other producers. In situations between perfect competition and monopoly, there are several large producers. The actions of any one producer have significant impacts on the other producers. In this situation, each producer needs to develop a strategy describing how best to respond to changes in the behavior of each of the other producers. This is where game theory comes into play. Game theory provides methods to help develop good strategies in situations where strategies are needed....
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