Chapter 9

Chapter 9 - Economics 101 1 The Theory of Games Chapter 9...

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Economics 101 Chapter 9: Thinking Strategically 1. The Theory of Games -Theory of Games -Game Theory -Opened up a vast new area of economic theory modeling imperfectly competitive situates involving Strategic Thinking : thinking about how to respond to how others respond to your actions -Influential in many applied areas: -Economic analysis industrial organization -International trade -Politics -Biology -And many other areas -Under perfect competition, the individual buyers and sellers pursue Selfish Strategies in a market environment that was not influenced by their decisions -In most “real life” situations the buyers and sellers react to each other’s behavior. This is what is modeled in Game Theory! -We study the efficiency properties of the outcomes of selfish and other strategies eg. co-operative -We find that, unlike perfect competition in most circumstances, the outcome of selfish behaviour is Economically Inefficient -Why do Economists Study “Games”? -In perfectly competitive market, each firm takes the market price as given -The only decision a firm can make is to decide how much to produce to maximize its profits -Because there are no future feedback effects from that decision, no strategic choices exist at the firm level -But many (most) markets are not like that -If the firm’s decision can influence the market price, the firm knows this will affect behaviour of other firms – which will influence future markets -The profit maximize firm has to make Strategic Choices – i.e. the firm has to develop its strategy (choice) knowing that its competitors will respond to that choice -Theory of Games -The payoff of many actions depends upon the actions of others -For example, an imperfectly competitive firm must weigh the response of rivals when deciding whether to cut their prices -The decisions of competing firms are often interdependent -Elements of a Game -Basic Elements : -The Players -The Strategies -The Payoffs
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Chapter 9 - Economics 101 1 The Theory of Games Chapter 9...

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