ManEconCh11 - MANAGERIAL ECONOMICS: THEORY, APPLICATIONS,...

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MANAGERIAL ECONOMICS: THEORY, APPLICATIONS, AND CASES W. Bruce Allen | Keith Weigelt | Neil Doherty | Edwin Mansfield CHAPTER  11 Game Theory
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MAKING STRATEGY AND  GAME THEORY Strategic managerial decisions: Characterized by  interactive payoffs in which managers must  explicitly consider the actions likely to be taken by  their rivals in response to their decisions Nonstrategic managerial decisions: Do not involve  other decision makers, so the reactions of other  decision makers do not have to be considered.
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MAKING STRATEGY AND  GAME THEORY Interactive: When the consequence of a  manager's decision depends on both the  manager's own action and the actions of  others There are no unconditional optimal strategies in  game theory; the optimality of a strategy  depends on the situation in which it is  implemented.
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STRATEGY BASICS All game theoretic models are defined by  five parameters. 1.  The players: A player is an entity that  makes decisions; models describe the  number and identities of players. 2.  The feasible strategy set: Actions with a  non-zero probability of occurring comprise  the feasible strategy set.
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STRATEGY BASICS All game theoretic models are defined by five  parameters. (Continued) 3.  The outcomes or consequences: The feasible  strategies of all players intersect to define an outcome  matrix. 4.  The payoffs: Every outcome has a defined payoff for  every player. Players are assumed to be rational, that is, to prefer a higher payoff to a lower one. 5.  The order of play: Play may be simultaneous or  nonsimultaneous, that is, sequential.
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VISUAL REPRESENTATION Matrix form: Form that summarizes all  possible outcomes Extensive form: Form that provides a road  map of player decisions Game trees: Game trees are another name  for extensive form games and are akin to  decision trees.
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VISUAL REPRESENTATION Examples Figure 11.1: A Two-Person Simultaneous Game Figure 11.2: Allied-Barkley Pricing: Sequential Figure 11.3: Allied-Barkley Pricing:  Simultaneous Uses information sets to use the extensive form to  represent simultaneous decisions
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SOLUTION CONCEPTS  AND EQUILIBRIA Solution Concepts Key to the solution of game theory problems is the  anticipation of the behavior of others. Equilibria Equilibrium: When no player has an incentive to  unilaterally change his or her strategy No player is able to improve his or her payoff by  unilaterally changing strategy.
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DOMINANT STRATEGIES Dominant strategies: A strategy whose payout in  any outcome is higher relative to all other feasible  strategies
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This note was uploaded on 03/30/2011 for the course ECON 3020 taught by Professor Lucas during the Spring '10 term at Hawaii Pacific.

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ManEconCh11 - MANAGERIAL ECONOMICS: THEORY, APPLICATIONS,...

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