lecture3 - Game Theory Mike Shor Lecture 3"Loretta's...

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Game Theory “Loretta’s driving because I’m drinking and I’m drinking because she’s driving.” - The Lockhorns Mike Shor Lecture    3
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Review Understanding the game Noting if the rules are flexible Anticipating our opponents’ reactions Thinking one step ahead Where does this lead us? We’ve defined the “game” but not the outcome Mike Shor 2
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Equilibrium The likely outcome of a game when rational, strategic agents interact Each player is playing his or her best strategy given the strategy choices of all other players No player has incentive to change his or her action unilaterally Outline: Model interactions as games Identify the equilibria Decide if they are likely to occur Mike Shor 3
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Cigarette Advertising on TV All US tobacco companies advertised heavily on TV Surgeon General issues official warning Cigarette smoking may be hazardous Cigarette companies fear lawsuits Government may recover healthcare costs Companies strike agreement Carry the warning label and cease TV advertising in exchange for immunity from federal lawsuits. Mike Shor 4 1964 1970
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Strategic Interaction Players: Reynolds and Philip Morris Strategies: Advertise or Not Advertise Payoffs: Companies’ Profits Strategic Landscape: Each firm earns $50 million from its customers Advertising costs a firm $20 million Advertising captures $30 million from competitor How to represent this game? Mike Shor 5
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Representing a Game Mike Shor 6 PLAYERS STRATEGIES PAYOFFS Philip Morris No Ad Ad Reynolds No Ad 50 , 50 20 , 60 Ad 60 , 20 30 , 30
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What to Do? If you are advising Reynolds, what strategy do you recommend? Mike Shor 7 Philip Morris No Ad Ad Reynolds No Ad 50 , 50 20 , 60 Ad 60 , 20 30 , 30
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Best reply for Reynolds: If Philip Morris advertises: If Philip Morris does not advertise:
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lecture3 - Game Theory Mike Shor Lecture 3"Loretta's...

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