econ2460unit3[1] - Unit 3 Game Theory and Strategic...

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Microeconomic Theory and Its Applications II ECON 2460 Module 1 Unit 3 1 Unit 3 Game Theory and Strategic Behaviour Learning objectives When you have completed this unit, you should be able to answer, in less than one page and in your own words, the following questions: 1. What is a payoff matrix? How does it describe strategic behaviour? 2. What is the difference between a dominant strategy and a Nash equilibrium? 3. What is the Prisoner’s dilemma game? How would co-operation affect this game? 4. What methods can be used to force the opponent to co-operate? 5. What does a credible threat mean? 6. Under what circumstances is it an advantage to move first? Assigned reading Chapter 13 in the textbook. Study notes Introducing strategic behaviour You will have learned in previous textbook chapters 10-12 that the idea of “competition” has a different meaning in microeconomics from its common usage on the street or in the boardroom. Firms that are “perfect competitors” (textbook chapter 10) do not, in fact, compete at all in the usual sense. There are so many firms producing a homogeneous product that none of them can influence its price; hence, each firm is a “price taker” and none of the price competition expected of competitive firms is observed. Such firms are nonetheless competing very hard because inefficient firms will quickly go bankrupt! [Why? If you are in doubt, review textbook chapter 10, the section on “Price Determination in the Long Run.” If your understanding of cost curves is rusty, review textbook chapter 8. What would be the relationship of an inefficient firm’s cost curves to an efficient firm’s costs curves and the cost curve for the industry?] Microeconomists view such competition as “perfect” not because firms compete via prices or advertising but because the outcome of such competition has certain desirable characteristics. [What are they? See textbook chapter 10, especially the section on “Producer Surplus, Total Surplus, and Efficient Output.”] Firms that are “imperfect competitors,” on the other hand, have some control over prices. Monopolistic competitors and oligopolists correspond most closely to the common idea of competitors. They have some power to set prices within limits established by consumer demand behaviour and the prospects of entry by other firms. But something familiar is missing from the discussion of competition: There is no consideration of “strategic behaviour” or behaviour that anticipates what rival firms will do. Yet, when firms compete, the anticipated response of rival firms is often an important factor in designing their business strategy. This chapter introduces various aspects of strategic decision making at an elementary level. Elementary game theory
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This note was uploaded on 03/12/2011 for the course ECON 2460 taught by Professor Hamid during the Spring '11 term at Manitoba.

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econ2460unit3[1] - Unit 3 Game Theory and Strategic...

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