KRUGMAN'S MICROECONOMICS for AP* Game Theory Margaret Ray and David Anderson 65 Module.

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KRUGMAN'S MICROECONOMICS for AP* Game Theory Margaret Ray and David Anderson 65 Module

One way to describe a game is by listing the players (or individuals) participating in the game, and for each player, listing the alternative choices (called actions or strategies) available to that player. In the case of a two-player game, the actions of the first player form the rows, and the actions of the second player the columns, of a matrix. Game Theory Basics

Oligopoly: Game Theory Dominant strategy: for one player, this strategy leads to the best result no matter what the other player does. Nash equilibrium: for both players, based on each others’ actions, the result cannot be improved upon. 2 dominant strategies would lead to a Nash equilibrium.

FINDING DOMINANT STRATEGIES 1. Firm #1: Considers the options that Firm #2 has, and what Firm #1’s best response would be to each option Firm 1 Firm 2

FINDING DOMINANT STRATEGIES 1. Firm #1: Considers the options that Firm #2 has, and what Firm #1’s best response would be to each option Firm 1 Firm 2

FINDING DOMINANT STRATEGIES 1. Firm #1: Considers the options that Firm #2 has, and what Firm #1’s best response would be to each option Firm 1 Firm 2

FINDING DOMINANT STRATEGIES 2. Firm #2: Considers the options that Firm #1 has, and what Firm #2’s best response would be to each option Firm 1 Firm 2

FINDING DOMINANT STRATEGIES 2. Firm #2: Considers the options that Firm #1 has, and what Firm #2’s best response would be to each option Firm 1 Firm 2

FINDING DOMINANT STRATEGIES 2. Firm #2: Considers the options that Firm #1 has, and what Firm #2’s best response would be to each option Firm 1 Firm 2 NO DOMINANT STRATEGY!

Oligopoly: Game Theory Dominant strategy: for one player, this strategy leads to the best result no matter what the other player does. Nash equilibrium: for both players, based on each others’ actions, the result cannot be improved upon. 2 dominant strategies would lead to a Nash equilibrium.

FINDING DOMINANT STRATEGIES 1. Firm #1: Considers the options that Firm #2 has, and what Firm #1’s best response would be to each option Firm 1 Firm 2 vv NASH EQUILIBRIUM