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Game Theory
Game Theory
 The
analysis of situations in which players
are interdependent.
 Or…from
the book….
 a method of modelling the strategic
interaction between firms in an oligopoly.
Prisoners’ Dilemma
A
game where, given the fact that
neither player knows the strategy of the
other player – the optimum strategy for
each player leads to a worse situation
than if they had known the strategy of the
other player.
 Or..from the book…
 An example of game theory with a range
of applications in an oligopoly.
The Prisoners’ Dilemma
 Confess
or not confess
Game Theory Pricing
Two firms – red and black
Don’t advertise
Don’t advertise
Advertise
Advertise
Two firms – red and black
Don’t advertise
Advertise
Don’t advertise
$5bn
$5bn
$1bn
$7bn
Advertise
$7bn
$1bn
$4bn
$4bn
Two drug dealers – blue
and orange.
Respect the turf
Respect the turf
Invade other
guy’s turf
Invade other guy’s
turf
A
strategy is dominant if, regardless of
what any other players do, the strategy
earns a player a larger payoff than any
other.
 Hence,
a strategy is dominant if it is always
better than any other strategy, for any profile of
other players' actions. Depending on whether
"better" is defined with weak or strict
inequalities, the strategy is termed strictly
dominant or weakly dominant. If one strategy is
dominant, than all others are dominated. For
example, in the prisoner's dilemma, each player
has a dominant strategy.