GLOBAL ECONOMICS (International Trade) Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” Day 18 卜安吉

International Trade, Day 182 Prisoner’s Dilemma Action of A\Action of BCooperateDefect CooperateFairly good [+ 5]Bad [ - 10] DefectGood [+ 10]Mediocre [0] Using a Non-zero-sum game Cooperation is usually analyzed in game theory

International Trade, Day 183 Prisoner’s Dilemma  There are two players  And Two Choices  To either “Cooperate" or to “Defect“  The “Payoff Matrix” – is name for the set of Choices

International Trade, Day 184 Prisoner’s Dilemma  Each player gains when both cooperate  But if only one of the players cooperates  The defector gains more  If both defect, both lose (or gain very little)  However, both do not lose as much as the "cheated" (the cooperator)

International Trade, Day 185 Prisoner’s Dilemma Action of A\Action of BCooperateDefect CooperateFairly good [+ 5]Bad [ - 10] DefectGood [+ 10]Mediocre [0] Payoff Matrix

International Trade, Day 186 Prisoner’s Dilemma The Origin of the Game  A Crime was committed  Two alleged criminals, both say I didn’t do it!  Police (Cops) play “good cop, bad cop”  Offer each a “DEAL” – I have a deal for YOU!  Confess and you get a lesser sentence!

International Trade, Day 187 Prisoner’s Dilemma If the Game is Zero Sum then:  Both cooperate then result is 5  One cooperates: receives +10  One does not cooperate: receives – 10  No one cooperated both receive 0!  Therefore, zero sum game!

International Trade, Day 188 Krugman’s Example Class Quiz on 11/5 ProduceNot Produce Produce Not Produce ProduceNot Produce Produce Not Produce Airbus Boeing Payoff Matrices

International Trade, Day 189 Krugman’s Example Boeing/Airbus Class Quiz  Boeing receives a head start in the first round  Therefore, Boeing will produce 100  Airbus will not produce (producing would result in a -5)  So Entry into the new market makes no sense for Airbus as Boeing has a head start!

International Trade, Day 1810 Krugman’s Example Boeing/Airbus Class Quiz  Europe gives Airbus a subsidy of 10  Therefore, Airbus will produce 110  Boeing will not produce (producing would result in a -5  So Entry into the new market makes total sense for Airbus when Europe subsidizes! From Paul Krugman, “Is Free Trade Passe?” Journal of Economic Perspectives (Fall 1987)

International Trade, Day 1811 Prisoner’s Dilemma Your Group’s Task  Worth 20 points if great, 15 if OK, 10 if not  Copied from anywhere – “-10”  Create a game with the rules  Zero sum or not – See our textbook for another example, real world  YOURS MUST BE REAL WORLD!

International Trade, Day 1812 Prisoner’s Dilemma Your Group’s Task  Due on Wednesday, November 12  You may ask me ahead of time if it is good  Originality will be graded positively  I will check the internet!  Do NOT use the example from Boeing/Airbus

International Trade, Day 1813 Prisoner’s Dilemma Notes  Note that NO COLLUSION is allowed  No repeated games either (short term)  Assume rational decision-makers  That is, in our case, both will defect because (without knowing the other’s choice) defection is best!