L15Nov11_306

L15Nov11_306 - Lect 15: Strategic Decisions, Prisoners...

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Lect 15: Strategic Decisions, Prisoner’s Dilemma FRE 306
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Lec 15: Strategic Decisions, Prisoner's Dilemma 2 Strategic Decisions IV: different types of games Single-period games vs repeated games Two-person games vs n-person games Latter more difficult to analyze: coalitions can develop Two person zero sum games (not so realistic) zero sum games are where the total gain or loss is fixed: one player’s gain = other player’s loss, and vice versa Two person non-zero sum games, both players may gain or lose depending on actions they take Classic example: prisoner’s dilemma (see below)
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Lec 15: Strategic Decisions, Prisoner's Dilemma 3 Strategic Decisions V Sequential games vs simultaneous games Sequential game often features important differences depending on who moves first (first-mover or second-mover advantage) These games represented by game or decision tree They are often best solved by endgame reasoning: look ahead to the last play in an ordered sequence of plays and move back to the beginning (backward induction) Notion of Nash Equilibrium: optimal decision action by player is such that the payoff, when all other players make their best-reply responses, exceeds that from all other decision actions Many other game theory issues: credible and non- credible threats and commitments, entry deterrents, contestable mkts
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Lec 15: Strategic Decisions, Prisoner's Dilemma 4 Prisoner’s Dilemma Two suspects accused of jointly committing crime Separated so they cannot communicate Penalty structure depends on whether they confess Each is told: If you confess and implicate your accomplice, but your partner does not confess , we will let you turn state’s evidence and you go free. – If neither of you confesses, you stay in jail for 6 months
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L15Nov11_306 - Lect 15: Strategic Decisions, Prisoners...

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