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Topic13_Game Theory

# American if united can chose first leader then the

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American If United can chose first (leader), then the Nash equilibrium changes to (American, United) = (48, 64) and United will make more \$64. Thus clearly the leader has an advantage in a sequential game. Thus when a game with multiple Nash equilibrium in normal form (simultaneous game) is played sequentially, we have unique Nash equilibrium. This Nash equilibrium changes depending on who is the leader.

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16 Sequential Games: United Vs. American However, if both the players have dominant strategies in simultaneous game, then playing the game sequentially would not change the Nash equilibrium irrespective of who is the leader. Consider a Prisoner’s Dilemma game. If this game is played sequentially, the Nash equilibrium does not change irrespective of who moves first.
17 Sequential Game No Ad Ad No Ad Ad Firm B 2, 2 0, 3 1, 1 3, 0 What is the Nash equilibrium of this game if played sequentially, instead of simultaneously?

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18 Sequential Games Firm B Firm B Firm A NO AD NO AD NO AD 2, 2 0, 3 1, 1 3, 0 A, B Will the Nash equilibrium change if Firm B (not A) is the leader? NO.
19 Credible Threats In the simultaneous game, why would not a firm threaten to produce more and force the rival to produce less? If Firm A produces leader’s output (more) but Firm B produces Cournot output, then Firm A would make less profits than had it also produced Cournot output. Thus such threats are not credible. For it to be credible it must be rational.

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20 Credible Threats A player can take some action to gain advantage in a market place (for example to deter entry or raise price). Such action that gives a player an advantage must be credible, however. It can be credible only if the player takes such action by constraining its own behavior (e.g., investment in a new plant). In this case the rival can believe that the firm’s strategy is rational.
21 Entry Deterrence An incumbent gas station (at a highway exit) can pay \$b to the landlord to have exclusive right to be the only gas station. In this case it can monopolize the market and earn 10 – b, where monopoly profits = 10. If it does not pay \$b, the potential entrant can

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American If United can chose first leader then the Nash...

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