Class 16-2010

Class 16-2010 - Managerial Econ Class 16 1 Cartel Video and...

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11/4/2010 1 THE UNIVERSITY OF BRITISH COLUMBIA Managerial Econ: Class 16 1. Cartel Video and Question 2. Introduction to Game Theory 3. Objectives of Game Theory 4. Static and Dynamic Games 5. The Nash equilibrium 6. Sequential games 7. Stackelberg Oligopoly THE UNIVERSITY OF BRITISH COLUMBIA According to the video, the lysine cartel fell apart because i) each firm in the cartel had an incentive to cheat on the cartel. ii) of legal enforcement of anti-collusion laws in the United States. iii) high profits encouraged entry by new firms. iv) all of the above. v) none of the above. Cartel Video Clicker Question 1

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11/4/2010 2 THE UNIVERSITY OF BRITISH COLUMBIA A game is any situation in which two or more players make strategic decisions that affect returns or payoffs to the players. Examples: card games, chess, athletic competitions, firms competing with each other by setting prices. 2. Introduction to Game Theory THE UNIVERSITY OF BRITISH COLUMBIA Defining a Game: Players, Strategies, Payoffs, and Rules A game consists of: players (like firm 1 and firm 2) strategies (like price = \$4 or price = \$6) payoffs (what each player gets for each combination of strategies) rules of the game (sequential or simultaneous move, etc.) The Cournot model and the Bertrand model are both examples of games. Those two games differ in that the available strategies are different – prices or quantities.
11/4/2010 3 THE UNIVERSITY OF BRITISH COLUMBIA Strategies A strategy can be quite simple – like charge a price of \$4. A strategy can be more complex, consisting of several actions – like charge a price of \$4 in period 1 then charge \$6 in period 2. Strategies can be contingent – like charge a price of \$6 in period 2 if my rival charges a price of \$6 in period 1, but charge \$4 otherwise. THE UNIVERSITY OF BRITISH COLUMBIA Payoffs The payoffs are what the players try to obtain. We will usually focus on games where the payoffs are profits or other monetary objectives. We often show payoffs in a payoff matrix. 10,10 25,5 5,25 20,20 iPod Low Price High Price Low Price High Price Blackberry

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11/4/2010 4 THE UNIVERSITY OF BRITISH COLUMBIA Rules of the Game The rules specify various important elements of the game like: Who moves first? Do players move sequentially or simultaneously? Can players sign binding agreements about their strategies? How long does the game last?
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Class 16-2010 - Managerial Econ Class 16 1 Cartel Video and...

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