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Perloff_397614_IM_Ch14 - Chapter 14 Game Theory Chapter...

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Chapter 14 Game Theory Chapter Outline 14.1 An Overview of Game Theory 14.2 Static Games Normal-Form Games Predicting a Game’s Outcome Multiple Nash Equilibria, No Nash Equilibrium, and Mixed Stategies Cooperation 14.3 Dynamic Games Sequential Game Repeated Game 14.4 Auctions Elements of Auctions Bidding Strategies in Private-Value Auctions Winner’s Curse Teaching Tips Chapter 14 is one that you may want to cover in detail, especially if you have a significant number of management majors or pre-MBA students. Some students view economic analysis, game theory in particular, and management strategy as separate entities. The value of this material is that it links pricing strategy, advertising profits, and entry decisions, and thus demonstrates the importance of understanding microeconomic theory for good decision making. The chapter begins with an overview of the game theory and then moves on to static games, where players must move simultaneously. It then reviews mixed stategies and dynamic games. As with Chapter 13, there is a substantial amount of self-teaching that can occur by having the class work in groups on selected problems (see Additional Questions and Problems later in this chapter) designed to make the points from each section. If the class has to work out the rules for effective strategy on their own, they are more likely to understand why such rules for behavior are important. When presenting game theory, consider dividing the class into small groups before making any formal presentation of types of equilibria and strategic rules. Give each group three or four games to solve, including a simple zero-sum game, a dominant strategy equilibrium where players follow a given strategy no matter what the other does, and a Nash equilibrium where the payoffs create a prisoners’ dilemma. (The Additional Questions and Problems section includes sample payoff matrices.) You can ask the groups to simply play the games at first, under the following rules. First, assume that each player must move simultaneously, and that no cooperation is allowed. Second, allow collusion between players, and finally, assume that one player
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192 Perloff • Microeconomics: Theory and Applications with Calculus gets to move first. Finally, you could ask the groups to try to write down general decision making rules for players, and note if they need to modify those rules when the game is played repeatedly. If you try this, you may find that students are quite good at identifying strategic decision making rules once they understand the games. By asking students to play the games first, you can then go back through the various outcomes and identify them as Cournot, cartel, and so on (see Chapter 13). One of the great advantages of game theory is that by simply changing the rules, the same payoff matrix can be evaluated more than once, with different outcomes. You can return to this discussion when covering the final section of the chapter on the comparison of output, price, and welfare effects for the various models.
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