Day 9 GAME THEORY. 3 Solution Methods for Non-Zero Sum Games Dominant Strategy Iterated Dominant Strategy Nash Equilibrium NON- ZERO SUM GAMES HOW TO.

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Presentation transcript:

Day 9 GAME THEORY

3 Solution Methods for Non-Zero Sum Games Dominant Strategy Iterated Dominant Strategy Nash Equilibrium NON- ZERO SUM GAMES HOW TO SOLVE? International Trade!

METHOD 1: DOMINANT STRATEGY SOLUTION Non-zero sum game 2 player, 3 strategy Dominant Strategy Solution is (Md, Ctr) Strong or weak dominance?

METHOD 2: ITERATED DOMINANCE Recall the homework problem for zero-sum game where we found dominance over and over again. We can do the same with a non-zero sum game. To keep vocab straight: Dominated strategy -- Bad Undominated strategy -- Good Dominant strategy -- Best

Consider player 1: Which strategy is dominated? Rewrite the game: Consider player 2: Which strategy is dominated? Rewrite the game: Consider player 1 again: which strategy is dominated? Rewrite for solution: ITERATED DOMINANCE EXAMPLE

METHOD 3: NASH EQUILIBRIUM Nash Equilibrium is a term used in game theory to describe an equilibrium where each player's strategy is optimal given the strategies of all other players. A Nash Equilibrium exists when there is no unilateral profitable deviation from any of the players involved. In other words, no player in the game would take a different action as long as every other player remains the same. Nash Equilibria are self-enforcing; when players are at a Nash Equilibrium they have no desire to move because they will be worse off.

NASH EQUILIBRIUM VS. DOMINANCE STRATEGY Consider the following payoff matrix:

EXAMPLE. PRICE COMPETITION Duopoly: When two companies share exclusively the market for a certain product. How can a company set their prices in order to receive maximum profit? Compare NE (Nash equilibrium) to IDS (iterated dominance strategy)