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13 game cartel - Chapt er 13 Car t els Games and Net wor k...

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Chapter 13 Cartels, Games and Network Goods
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People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. Adam Smith, Wealth of Nations Book I, Chapter 10, Part II
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Game Theory and Collusion People of the same trade can benefit if they can agree to restrict output and raise prices After all, that’s how monopolists earn economic profit Successfully colluding is harder than it may appear, however We will use Game Theory to discover why
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Neoclassical Economics and Optimization We are studying the Neoclassical model of economics We assume that persons maximize their utility (happiness) Firms maximize profits Consumers maximize utility Politicians maximize their chances of (re)election This is straightforward if the maximizer can control the relevant variables
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Game Theory What if maximizing your utility depends not only on what you do, but what other people do? What if their objectives are in conflict with your own?
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Game Theory “There are two kinds of people in the world. Johnny von Neumann and the rest of us.” - Eugene Wigner, a Noble Prize-winning physicist. John von Neumann “When I am picking problems to work on, ones that stumped John von Neumann go to the bottom of the stack.” - David Friedman
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Game Theory in a nutshell Games Players Strategies Payoffs
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Games have players. Each player has a set of strategies. For every possible combination of players and strategies, a payoff for each player is defined.
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Prisoner’s Dilemma Player 2 Say nothing Confess Player 1 Say nothing -6 mo , -6 mo -5 yr , -3 mo Confess -3 mo , -5 yr -2 yr , -2 yr
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