kf010 - StrategicChoiceinOligopoly,...

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1 Ka-fu Wong University of Hong Kong Strategic Choice in Oligopoly,  Monopolistic Competition, and  Everyday Life
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2 Games and Strategic Behavior Thus far, we have viewed economic decision makers as  confronting an environment that is essentially passive.   But there exist many cases in which relevant costs and  benefits depend not only on the behavior of the decision  makers themselves but also on the behavior of others.
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3 Example 10.1.   Should the prisoners confess?
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4 Example 10.1.   Should the prisoners confess? Two prisoners, X and Y, are held in separate cells for a  serious crime that they did, in fact, commit.   The prosecutor, however, has only enough hard  evidence to convict them of a minor offense, for which  the penalty is, say, a year in jail. Each prisoner is told that if one confesses while the  other remains silent, the confessor will go free while the  other spends 20 years in prison.   If both confess, they will get an intermediate sentence,  say five years.
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5 Example 10.1.   Should the prisoners confess? It is often convenient to summarize the elements of a  game in the form of a payoff matrix. Three elements: 1. Players (2 prisoners) 2. Strategies (confess, remain silent) 3. Payoffs (jail sentences)
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6 Example 10.1.   Should the prisoners confess? Prisoner X Prisoner Y Confess Remain Silent 5 years for each 1 year for each 20 years for X 0 years for Y 0 years for X 20 years for Y Confess Remain Silent The two prisoners are not allowed to communicate with one another.   If the prisoners are rational and narrowly self-interested, what will they do?
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7 Example 10.1.   Should the prisoners confess? Prisoner X Prisoner Y Confess Remain Silent 5 years for each 1 year for each 20 years for X 0 years for Y 0 years for X 20 years for Y Confess Remain Silent Their  dominant strategy  is to  confess.   No matter what Y does, X  gets a lighter sentence by  speaking out. 1. If Y too confesses, X gets  five years instead of 20.   2. And if Y remains silent, X  goes free instead of spending  a year in jail.   The payoffs are perfectly  symmetric, so Y also does  better to confess, no matter  what X does. Dominant Strategy One that yields a higher payoff  no matter what the other  players in a game choose.
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8 Example 10.1.   Should the prisoners confess? The difficulty is that when each behaves in a self- interested way, both do worse than if each had shown  restraint.   Thus, when both confess, they get five years, instead of  the one year they could have gotten by remaining silent.  And hence the name of this game,  prisoner's  dilemma .
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Example 10.2. Why did students have to wait in line overnight 
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kf010 - StrategicChoiceinOligopoly,...

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