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9 Game Theory

This document discusses game theory. It defines game theory as concerned with decisions individuals make when their actions affect each other. It describes different types of games, including zero-sum and non-zero-sum games, as well as cooperative and non-cooperative games. It also discusses Nash equilibrium, where each player's strategy is optimal given others' strategies. Examples of games analyzed using game theory include the prisoner's dilemma.

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Keshav Chowdhary
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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21 views12 pages

9 Game Theory

This document discusses game theory. It defines game theory as concerned with decisions individuals make when their actions affect each other. It describes different types of games, including zero-sum and non-zero-sum games, as well as cooperative and non-cooperative games. It also discusses Nash equilibrium, where each player's strategy is optimal given others' strategies. Examples of games analyzed using game theory include the prisoner's dilemma.

Uploaded by

Keshav Chowdhary
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Game Theory

Dr. Irfan Ahmad Shah


NMIMS, Hyderabad

Dr. Irfan Ahmad Shah Game Theory


Introduction

The MR = MC condition has a basic aw of other things being


constant, especially the reaction of competitors.
In reality, managers face changing competitive reactions and
changing consumer preferences
Two important theories:
Game theory
Theory of asymmetric information

Dr. Irfan Ahmad Shah Game Theory


Game theory

Game theory is concerned with the "decisions of individuals when


they are aware that their actions aect each other and each
individual takes this into account"
Types of games"
Zero and non zero sum game
Cooperative and non-cooperative game
Two-person or n-person game

Dr. Irfan Ahmad Shah Game Theory


Game theory

In zero sum game, the gain of one player directly reects the loss of
another player.
In non-zero sum game, all players can gain or lose

Dr. Irfan Ahmad Shah Game Theory


Game theory

Game theory is used to analyze the strategic interaction in oligopoly


market
A game involves players (Firms), who are decision making units
Two players with each one having two strategies (2 x 2 game)
The outcome with each possible alternative is know as the Payos
Payos are the outcomes associated with the set of strategies
Payo matrix is a table that describes the outcome for each player

Dr. Irfan Ahmad Shah Game Theory


Dominant Strategy Game theory

Dominant strategy is the strategy that produces the optimal


outcome regardless of what others do.
Dominant strategy equilibrium arises when both the players in the
game chooses its dominant strategy

Dr. Irfan Ahmad Shah Game Theory


No Dominant Strategy or Nash Equilibrium

The optimal strategy depends on the other.


In Table 11.2, nd white's optimal strategy and Gray's dominant
strategy
Nash Equilibrium - John Nash in 1951
A Nash equilibrium occurs if every player's strategy is optimal given
its competitor's strategy.
In Nash equilibrium, each player is doing its best given the strategy
of all other opponents (IB is the Nash Equilibrium)

Dr. Irfan Ahmad Shah Game Theory


Nash Equilibrium Game theory

In the context of Table 11.2, the pair of strategies IB is a Nash


equilibrium because strategy I is optimal for White if B is chosen by
Gray, and B is optimal for Gray if I is chosen by White
In fact as already noted, B is optimal for Gray regardless of White's
choice
Dr. Irfan Ahmad Shah Game Theory
Nash Equilibrium

Nash Equilibrium is a broader concept compared to dominant


strategy
A dominant strategy is a Nash equilibrium but not vice versa
Some games will have no Nash equilibrium while other may have
more than one.
Each player's best choice is the one they did not choose!

Dr. Irfan Ahmad Shah Game Theory


Two Nash Equilibria

How to position a new product


IA and IIB (Doing something similar) while other two are Nash
equilibria
I is good for white while A is good for Gray. Who will choose what?

Dr. Irfan Ahmad Shah Game Theory


Prisoners' Dilemma

If neither suspect confesses, both will be convicted of 1 year


sentence.
If only one suspect confesses, the other will receive a 15 year
sentence.
If both suspects confess, both will be put away for 10 years

Dr. Irfan Ahmad Shah Game Theory


Prisoners' Dilemma

Confession is a dominant strategy for both


If they could communicate then what will be dominant strategy
Incentive to cheat
Standard interrogation technique
Cartel in oligopoly for earning joint prot
Cheating is a dominant strategy
Dr. Irfan Ahmad Shah Game Theory

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