Game Theory Lesson 15 Section 65

Games Oligopolists Play Game Theory is a decision making process where there are two or more persons, and the payoff for A is influenced by decisions made by B, C, D etc... In order to study these decisions, we create a Payoff Matrix.

Game Theory The field of game theory came into being with the 1944 classic Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. A major center for the development of game theory was RAND Corporation where it helped to define nuclear strategies Made popular by John Nash’s “Prisoner’s Dilemma”, game theory has come to dominate economic and political thinking. Prisoner B Stays Silent Prisoner B Betrays Prisoner A Stays Silent Each serves six months Prisoner A serves ten years Prisoner B goes free Prisoner A Betrays Prisoner A goes free Prisoner B serves ten years Each serves five years

Making Decisions Dominant Strategy Nash Equilibrium Strategic Behavior The strategy that delivers the best outcomes Nash Equilibrium Where a player has no incentive to change their actions, the actions of others are ignored Non-cooperative equilibrium Strategic Behavior Tit for Tat Tacit Collusion

Pirate Game There are five rational pirates, A, B, C, D and E. They find 100 gold coins. They must decide how to distribute them The Pirates have a strict order of seniority: A > B > C > D > E. The Pirate world's rules of distribution are thus: The most senior pirate proposes a distribution of coins. The pirates vote on this distribution; The proposer is a tie breaker. If the proposed allocation is approved by vote, it happens, if not, the proposer is thrown overboard on the pirate ship and dies, and the next most senior pirate makes a new proposal to begin the system again. First of all, the pirates want to survive. Secondly, the pirates want to maximize the amount of gold coins they receive and, Thirdly, they like throwing other pirates overboard.