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Topic12_Game Theory

# However both are better off with(no ad no ad a game

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Unformatted text preview: However both are better off with (No Ad, No Ad). A game in which a better strategy exists but players choose worse outcome is called Prisoner’s Dilemma (PD). In a PD game both players have dominant strategy. 16 Types of Nash Equilibria We can categorize games based on strategies firms use and the number of Nash equilibria. Firms can use either Pure Strategy , in which players employ one strategy with certainty . Or firms can use mixed strategy in which choice is made according to probability it assigns to different strategies. 17 Types of Nash Equilibria In the Pure Strategy games, when at least one player has a dominant strategy, the outcome is a unique (i.e., only one) Nash equilibrium. For example in advertising game, both players have dominant strategies. Whereas in the modified advertising game, only Firm B has a dominant strategy. In both the games, there is a unique Nash equilibrium. 18 Multiple Nash Equilibria: Product Choice game Crispy Sweet Crispy Sweet Firm 2 -5, -5 10, 10 -5, -5 10, 10 19 Multiple Nash Equilibria If Firm 2 introduces Crispy (C), Firm 1’s best action/response is Sweet (S). Similarly, if Firm 1 introduces “Crispy,” it is best for Firm 2 to choose “Sweet.” So there are two (multiple) Nash equilibrium in this game in Pure Strategies. This is because no player has a dominant strategy in this product-choice co-ordination game. 20 Multiple Nash Equilibria Wednesday Thursday Wed Thurs Network 1 -10, -10 10, 10 -10, -10 10, 10 In this co-ordination game, once they choose (Wed, Thurs) or (Thurs, Wed), there is no incentives to deviate. 21 Multiple Nash Equilibria How can the 2 networks avoid disaster in this co-ordination game? A network can communicate (cheap talk) with its rival before choosing its strategy. There is incentives to truthfully reveal its intentions and follow through accordingly. Players can credibly co-ordinate to select one of the two equilibria. 22 Co-ordination Game and Pareto Criterion Wednesday Thursday Wed Thurs Network 1 -10, -10 10, 10 -10, -10 15, 15 In this co-ordination game, (Thurs, Wed) is a Nash equilibrium as this Pareto dominates (Wed, Thurs). (Wed, Thurs)....
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