Jan 25, 2011

Jan 25, 2011 - January 25, 2011 - Lecture 6 Hotelling (ER,...

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Hotelling (E R , E J ) Rene (Player 1) , E R Jack (Player 2) , E J uniform distribution This example is about two candidates campaigning about how much money they will each allot to education Rene says she will allocate $400 million and Jack says he will allocate $800 million Those who think $400 million is too little will vote for Jack, but those who think $800 is too much will vote for Rene However, if the ideal amount for education is somewhere in between, say $600 million, then some people will vote for Rene and other for Jack This would occur if some voters thought the ideal amount ($600 million) to be too much or too little (as is shown in the diagram above) If we use the Principle of Minimum Differentiation, we see a method through which Rene and Jack can maximize the number of votes they each get The basic idea is to choose a number slightly higher or lower than the one the opponent chooses, in order to get a higher payoff For example, if Rene we ʼ re to choose $200 million (0.2) as her allocation for education, then she would get all the votes of those who think anything below that is too low (as is shown below) If Jack wants to maximize his votes, he ʼ ll choose the closest value to Rene
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Jan 25, 2011 - January 25, 2011 - Lecture 6 Hotelling (ER,...

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