Psych184-SequentialGames

# Psych184-SequentialGames - Intro to Game Theory Focus on...

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4/29/13’ 1’ Intro’to’Game’Theory:’Focus’on’ Sequen;al’Games’ Game’Theory’Terms’ Nash’equilibrium :’A’situa;on’where’no’player’ can’improve’his/her’payof’given’what’the’other’ players’are’doing.’ Subgame ’per±ect’equilibrium :’An’equilibrium’ where’a’Nash’equilibrium’is’played’in’every’stage’ o±’a’game.’ Backward’induc;on :’A’method’o±’²nding’ subgame’per±ect’ equilibria’by’²nding’the’Nash’ equilibrium’o±’the’last’game’and’working’ backwards.’

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4/29/13’ 2’ A’Computer’Chip’Manufacturer’ Incumbent’Frm’produces’3’million’computer’ chips’per’year’at’a’cost’of’\$1’billion’ Average’cost’=’\$333.33’ Average’price’=’\$700’ Average’proFt’=’\$700’-’\$333.33’=’\$366.67’ Total Proft = \$366.67 x 3,000,000 chips = \$1.1 billion One’Poten;al’Compe;tor’ A’new’Frm’is’considering’building’a’plant’that’ would’sell’compe;ng’computer’chips.’ If’this’new’Frm’builds,’the’price’will’fall’from’ \$700’per’chip’to’\$400’per’chip.’ Each’Frm’will’make’\$200’million’proFt’each’ year.’
4/29/13’ 3’ Two’Poten;al’Compe;tors’ If’two’new’Frms’enter’the’market,’the’price’ will’fall’to’\$200’per’chip.’ This’is’less’than’the’average’cost’of’producing’ each’chip’(\$333.33).’ Each’Frm’will’lose’\$400’million’dollars’each’ year.’ Deterring’Entry’

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Psych184-SequentialGames - Intro to Game Theory Focus on...

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