chp 14 instructor manual

chp 14 instructor manual - Chapter 14 GAME THEORY AND...

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Chapter 14 GAME THEORY AND COMPETITIVE STRATEGY Q14.1 From a game theory perspective, how would you characterize the bargaining between a customer and a used car dealer? Q14.1 ANSWER This type of bargaining situation can be characterized as a cooperative zero-sum game. In a zero-sum game, one player’s gain is another player’s loss. In the options market, for example, any profit recorded by the buyer of an option is exactly matched by the loss suffered by the seller of that option. Similarly, the only way for the seller of an option to gain is by having the buyer record a loss. In many other game theory situations, individuals and firms find themselves in situations where there is the potential for mutual gain or mutual harm. If parties are engaged in a game that holds the potential for mutual gain, it is called a positive-sum game. When conflict holds the potential for mutual loss, it is called a negative-sum game. Q14.2 Suppose Exxon Mobil Corp. independently reduced the price of gasoline, and that this price cut was quickly matched by competitors. Could these actions be described as reflective of a cooperative game? Q14.2 ANSWER No. If Exxon Mobil independently reduced the price of gasoline, and this price cut was quickly matched by competitors, these actions could be described as reflective of a noncooperative game. Cooperative games favor collaboration in decision making, and the decision to cut prices here was made without consultation among competitors. Q14.3 Characterize the essential difference between a sequential game and a simultaneous- move game. Q14.3 ANSWER In a sequential game, each player moves in succession, and each player is aware of all prior moves. The general principle for players in a sequential game is to look ahead and extrapolate back. A simultaneous game is one in which all players make decisions (or select a strategy) without knowledge of the strategies that are being chosen by other players. Even though the decisions may be made at different points in time, the game is synchronous because each player has no information about the
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184 Chapter 14 decisions of others; it is as if the decisions are made simultaneously. Simultaneous games are solved using the concept of Nash equilibrium. Q14.4 Explain how the Prisoner’s Dilemma example shows that rational self-interested play does not always result in the best solution for all parties. Q14.4 ANSWER In the classic prisoner's dilemma, if either prisoner knew the other prisoner would stay silent, their best move would be to betray. If either prisoner knew the other prisoner would betray, their best move would be still to betray. Betraying is a dominant strategy, but when both betray each prisoner is worse off than if both remained silent. Decisions based upon rational self-interest results in each prisoner being worse off than had they remained silent. The paradox of the situation lies in the fact that betray is the best individual strategy, but suboptimal for the pair. Q14.5
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This note was uploaded on 03/08/2011 for the course ECONABA 635 taught by Professor Leiter during the Summer '10 term at Andrew Jackson.

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chp 14 instructor manual - Chapter 14 GAME THEORY AND...

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