3 - I Strategic behavior o A Bilateral monopoly o 1...

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I. Strategic behavior: o A. Bilateral monopoly. 1. Economic example: I have the only apple, worth $1 to me. You are the only customer, and value it at $2. If we can agree on a price, there is a net gain of $1 to be divided between us, with the division implied by the price. 2. My six-year-old threatens to throw a tantrum if she doesn't get her way. Doing so imposes net costs, so there is a gain to finding some mutually acceptable outcome. Don't assume you can simply be firm and always win. You may have thought out the logic of bilateral monopoly bargaining better than she has, but she has a hundred million years of evolution on her side--during which offspring who succeeded in getting a larger share of parental resources were more likely to survive to reproduce. 3. Doomsday machine. a. The idea. Lots of very dirty bombs buried under the Rockies. If the Russians attack, the bombs go off and the fallout kills everyone on earth. So the Russians won't attack, and we don't need bombers and missiles. b. The reality: Our (and their) nuclear systems were doomsday machines, with human triggers. They worked, and therefore were not used--fortunately. 4. Bully: If you train yourself to punch out anyone who gets in your way, and people know it, they will stay out of your way, and you don't have to fulfill the commitment--until you run into someone else following the same strategy, and one of you ends up dead. A doomsday machine on the individual level. 5. In general, the outcome of such games depends largely on issues of commitment and reputation, which are hard to include in our analysis. o B. Prisoner's Dilemma 1. Simple: Both prisoners are better off if both keep their mouths shut, but given what one does, the other is always better off confessing. So they both confess. 2. Iterated. If we play the game multiple times, you might think that a prisoner would keep his mouth shut one time, for fear his partner would betray him next time in revenge. 3. Why it doesn't work: a. On the last play, no further threats of retaliation remain, so we are back with the original game--and both players betray. b. But since I know you are going to betray me on the last play, there is no cost to me to betraying you on the play before last. c. Repeat. The whole series of plays unravels, and we both betray every time. d. It seems intuitively wrong, but logically right. 4. Why it does work:
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a. In the real world, we are playing such games an indefinite number of times b. And want a reputation for being people who don't betray their partners, so that people will be willing to work with us, and . .. c. Not betray us, since they want a reputation for not betraying honest partners. d. All of which is hard to model.
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This note was uploaded on 04/05/2012 for the course ECON 395 taught by Professor Beckett during the Fall '11 term at Rutgers.

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3 - I Strategic behavior o A Bilateral monopoly o 1...

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