Lecture 24 exam 3 - Announcements MT scores are posted HW...

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Announcements MT scores are posted HW for ch 15 due Monday The “skip” schedule has been changed slightly – the due date for the ch 17 HW has been moved up. There is an updated version on BB. Starting ch11 on Monday 1 of 38
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2 of 38 Recall: Here C has no dominant strategy but D does. So C can assume D will play “right” and given that, it is best for C to play “bottom”.
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3 of 38 Game Theory Now suppose C can lose a lot if D makes a mistake and chooses “Left”. To be safe, C might choose “Top” to avoid any chance of losing $10,000. By introducing any UNCERTAINTY into the game, we can change the outcome.
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4 of 38 Game theory maximin strategy In game theory, a strategy chosen to maximize the minimum gain that can be earned. Basically, players choose the strategy that has the most attractive “worst case” scenario. C’s strategy in the previous example is known as a “Maximin” strategy
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5 of 38 Game theory Nash equilibrium In game theory, the result of all players’ playing their best strategy given what their competitors are doing. The “solution” to these games is called a “Nash Equilibrium”. The idea that these games all have solutions in which both players are playing their best strategy based on what the other player is doing was proven by John Nash – the “A Beautiful Mind” guy and Nobel Prize winner.
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Repeated Games While things are fairly straight-forward with “one-shot” games (games that are only played once), they get more complex when games are repeated – as they often are in the real world. Reconsider the advertising game we saw. What if the two firms face this problem every year. Eventually they may realize it’s better if neither firm advertises. In essence, the firms learn how to tacitly collude to do what is best for both. The problem though, is getting to a state where no one is advertising. 6 of 38
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7 of 38 Game theory REPEATED GAMES-An example in the Airline Industry Here, the one-shot equilibrium is for both to charge $400. But if one firm deviates and charges $600, the other may follow and both would be better off in the long run. Payoff Matrix for Airline Game
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Repeated Games 8 of 38 tit-for-tat strategy A company’s strategy that lets a competitor know the company will follow the competitor’s lead. A player in one round simply mimics the other player’s behavior in the previous round – it’s the optimal strategy for getting the other player to cooperate. In the airline example, if British Airways deviates from the $400 equilibrium and charges $600, Lufthansa could play a tit-for-tat strategy by also raising its price. Now, with both charging $600, if either firm tries to “cheat” by charging $400, the other firm will respond immediately by lowering its price and they get into a price war.
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Ch. 15 – regulation (you should read this chapter before doing the HW) The US government keeps a close eye on firms and industries for signs of “anticompetitive behavior”.
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