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Lecture10_ - Strategic Choice LECT U RE Games and Strategic...

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Strategic Choice LECTURE
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Slide 2 Games and Strategic Behavior Thus far, we have viewed economic decision makers as confronting an environment that is essentially passive. But there exist many cases in which relevant costs and benefits depend not only on the behavior of the decision makers themselves but also on the behavior of others .
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Slide 3 Thinking Strategically Interdependencies: In making choices, people/firms must consider the effect of their behavior on others. If opens a new store in Causeway Bay, how should respond? Imperfectly competitive firms may consider how rivals will respond to price changes or to new advertising.
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Slide 4 Game Theory Game theory is a useful tool to help better understand the strategic decisions of rival firms. To analyze the choices facing each player. To design utility-maximizing actions, or strategies , that respond to every action of the other players.
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Slide 5 The Prisoner’s Dilemma People (firms) often fail to cooperate with one another even when cooperation would make them better off. => The prisoner’s dilemma is a particular game that illustrates why cooperation is difficult to maintain even when it is mutually beneficial .
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Slide 6 The Prisoner’s Dilemma Scenario: Two prisoners (Ann and Peter) have been arrested for a crime that they committed and accused of collaborating in this crime. They are in separate jail cells and cannot communicate. Each has been asked to confess to the crime.
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Slide 7 The Prisoner’s Dilemma Scenario: The prosecutor, however, has only enough hard evidence to convict them of a minor offense, for which the penalty is a year in jail. Each prisoner is told that if one confesses while the other remains silent, the confessor will go free while the other spends 20 years in prison. If both confess, they will get an intermediate sentence, 5 years.
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Slide 8 The Prisoner’s Dilemma Basic elements of a game: The players (2 prisoners). Their strategies (confess, remain silent). The payoffs (jail sentences). The elements of a game can be summarized in the form of a payoff matrix .
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Slide 9 The Payoff Matrix for a Prisoner’s Dilemma Confess Remain Silent Confess Remain Silent Peter Ann 5 years 5 years for each for each 20 years for Peter 20 years for Peter 0 years for Ann 0 years for Ann 1 year 1 year for each 0 years for Peter 0 years for Peter 20 years for Ann 20 years for Ann
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Slide 10 The Prisoner’s Dilemma Should the prisoners confess? If the prisoners are rational and narrowly self-interested, what will they do?
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Slide 11 The Prisoner’s Dilemma A strategy for Ann: If Peter confesses and… … she confesses, she gets 5 years. … she remains silent, she gets 20 years.
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