Game theory

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Game theory

• The exam bits!

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Answers to Multi choice HWK
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Multi choice Questions from old Edexcel paper
Jan 2009.
A
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Explanation for 3 marks

• Characteristic of oligopoly (few sellers, many
  buyers/large scale industry, dominated by a few
  firms, price rigidity) (1 mark)
• Since demand is inelastic, a price cut will cause
  total revenue to fall (1 mark).
• A price cut would result in a price war and hence
  demand is inelastic (1 mark)
• Diagram of kinked-demand curve, depicting a fall
  in revenue as price is cut (1 mark).
• Example of non-price competition (1 mark)

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E
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Explanation for 3 marks

• Explanation of concentration ratio (the combined
  market share of the x largest firms) (1 mark).
• Identification that market structure is oligopoly
  (1 mark).
• Application to data, for example, four-firm
  concentration ratio increased from 66 in 1998 to
  76 in 2008 (11) OR calculation of increase in
  market concentration of 10 (1 mark).

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D
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Explanation for 3 marks

• Definition of marginal revenue i.e. ?TR / ?Q(1
  mark).
• Marginal revenue is zero at point X (1 mark).
• Annotation of diagram, showing total revenue at a
  maximum above position X (1 mark).
• Explanation of why revenue maximisation occurs at
  MR0 (marginal analysis to the left of X MR is
  positive and to the right MR is negative) (1
  mark).

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Game theory
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Syllabus Aims.

• Use simple game theory to illustrate the
  interdependence that exists in oligopolistic
  markets.
• Students will be expected to have an
  understanding of prisoners dilemma and a simple
  two firm/two outcome model.
• Students should analyse the advantages /
  disadvantages of being a first mover.

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Game theory

• This is central to understanding interdependence
  in oligopolies why the demand curve is kinked!
• The key to oligopolies is to understand the
  market conduct of the oligopolies predicted
  their behaviour.
• But can you ever understand other peoples
  behaviour???

Might have to open from My Videos
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Your go.

• Two volunteers

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Fancy a game of chicken?

• Two hooligans with something to prove drive at
  each other on a narrow road.
• The first to swerve loses faces among his peers.
• If neither swerves, however, a terminal fate
  plagues both.

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(No Transcript)
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Chicken grid

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Different types of strategies

• Dominant strategy
• First mover
• Zero sum strategy
• Maximin strategy
• Other issues
• Non price competition
• collusion

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Dominant Strategy

• Dominant strategy exists where a single strategy
  is best for a player no matter what strategy the
  other player takes.
• You choose the path which should allow you to
  maximise your winning.
• In the game of chicken you play to win dont
  swerve!

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RD Game Dominant Strategy
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Research and Development Game
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Zero Sum strategy
Who wins or looses? 0 draw 1 win -1 loose
?
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Zero Sum strategy
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Nash Equilibrium

• Not part of your syllabus but the more
  interesting
• Nobel Prize mathematician
• Film A Beautiful Mind

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First Mover

• Market conduct is it worth a company to act
  1st?
• For RD requires a lot of financial investment,
  human resources time.
• If the company creates a new product/service it
  could gain them profits/prestige with a patent,
  trademark etc
• Or it could fail..!

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Maximin Strategy risk adverse

• This involves thev company taking a strategy to
  minimise risks!
• This usually involves taking NO ACTION, leave
  prices unchanged.
• This is the least cost strategy of doing nothing!
• The best of all monopoly profits is a quiet
  life J R Hicks (British Economist)

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Other issues

• Click here for a game of prisoner dilemma

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Non Price Competition

• Advertising
• Brand development
• Eg Kelloggs, Heinz, Mars, Jaguar, Ovaltine

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Collusion

• Using the prisoner dilemma type tables, there is
  always a temptation to cheat on your other
  partner
• You could both plead innocence or guilt.. And
  you could stitch up your partner too!

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A real scenario

• 50 public schools fined for fixing their fees
• Textbook p358 Q3

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Further reading

• http//www.gametheory.net/students.html

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HOMEWORK extra reading on Game theory

• Read textbook chapter 54 p354 360
• OUR SYLLABUS doesnt cover NASH equilibrium!
• ESPECIALLY the applied ec article on PC operating
  systemsp359 a good real business example of
  Microsoft v Linux
• Reminder of essay due in next lesson
• Explain the difference in how the equilibrium
  level of output is determined in perfect
  competition, in a monopoly and in an oligopoly
  market structure. 20 marks