Lecture Principles of economics (Asia Global Edition) - Chapter 9

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Games and Strategic

Behavior

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Learning Objectives

1. List the three basic elements of a game.

Recognize and discuss the effects of dominant
strategies and dominated strategies

2. Identify and explain the prisoner's dilemma and
how it applies to real-world situations

3. Explain games in which the timing of players'
choices matter

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Strategies and Payoffs

• Actions have payoffs that depend on:

– The actions

– When they are taken
– The actions of others

• Some markets are characterized by
interdependence

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Game Theory

• <b>Basic elements of a game:</b>

– The players

– Their available strategies, actions, or decisions
– The payoff to each player for each possible action

• A <b>dominant strategy</b> is one that yields a higher

payoff no matter what the other player does

– A <b>dominated strategy</b> is any other strategy available

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Singapore and Thai – Scenario 1

• Players: Singapore Airlines and Thai Airways

supplying service between Singapore and
Bangkok

– No other carriers

• Strategies: Increase advertising by $1,000 or not
• Assumption: all payoffs are know to all parties

• A <b>payoff matrix </b>is a table that describes the

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Payoff Matrix

• Payoff is symmetric

• Dominant strategy is raise advertising spending

– Both companies are worse off

<b>Thai Airways Options</b>
<b>Singapore </b>

<b>Airlines Options</b> <b>Raise Spending</b> <b>No Raise</b>
<b>Raise Spending</b> <b>Singapore: $5,500</b>

<b>Thai: </b> <b>$5,500</b>

<b>Singapore:</b> <b>$8,000</b>

<b>Thai:</b> <b>$2,000</b>

<b>No Raise</b> <b>Singapore:</b> <b>$2,000</b>

<b>Thai:</b> <b>$8,000</b>

<b>Singapore:</b> <b>$6,000</b>

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Equilibrium in a Game

• A <b>Nash equilibrium</b> is any combination of

strategies in which each player’s strategy is her
or his best choice, given the other player’s

strategies

– Equilibrium occurs when each player follows his

dominant strategy, if it exists

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• Same situation

– Different payoffs; non-symmetric

– Thai raises spending

• Singapore anticipates Thai action; does not raise

<b>Lower-Left cell is a </b>
<b>Nash equilibrium</b>

<b>Thai Airways Options</b>

<b>Singapore </b>
<b>Airlines </b>
<b>Options</b>

<b>Raise Spending</b> <b>No Raise</b>

<b>Raise </b>

<b>Spending</b>

<b>Singapore: $3,000</b>

<b>Thai: $4,000</b>

<b>Singapore: $8,000</b>

<b>Thai:</b> <b>$3,000</b>

<b>No Raise</b> <b>Singapore: $4,000</b>

<b>Thai: $5,000</b>

<b>Singapore: </b> <b>$5,000</b>

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Prisoner’s Dilemma

• The advertising example illustrates an important
class of games called the prisoner’s dilemma

• The <b>prisoner’s dilemma </b>is a game in which

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9­10

– Two prisoners are held in separate cells for a serious

crime they did commit

– The prosecutor lacks sufficient evidence

<b>Kakuzu's Options</b>
<b>Hidan's </b>

<b>Options</b> <b>Confess</b> <b>Don't Confess</b>

<b>Confess</b> <b>Hidan:</b> <b>5 years</b>

<b>Kakuzu:</b> <b>5 years</b>

<b>Hidan:</b> <b>0 years</b>

<b>Kakuzu:</b> <b>20 years</b>
<b>Don't Confess</b> <b>Hidan:</b> <b>20 years</b>

<b>Kakuzu:</b> <b>0 years</b>

<b>Hidan:</b> <b>1 year</b>

<b>Kakuzu:</b> <b>1 year</b>

<b>Dominant</b>
strategy

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