Part 3. Oligopoly pricing Game theory 1 Classic models of oligopoly Game theory 2 Dynamic models of oligopoly Product differentiation Identifying and measuring market power
Part 3. Oligopoly pricing Game theory 1 Classic models of oligopoly Game theory 2 Dynamic models of oligopoly Product differentiation Identifying and measuring market power
Game theory 1 Why game theory Foundations and principles Static games of complete information Summary
Game theory 1 • Why game theory • Foundations and principles • Static games of complete information • Summary
Why game theory? Game-theoretic situation payoff interdependency or strategic Interdependency Payoff interdependency exists when the optimal choice by an agent depends on the actions of others The mutual dependency of payoffs on the actions by all players defines a game-theoretic situation. In contrast, decision theoretic situations are when there is no recognized payoff interdependence: the payoffs or profits of an action are determined without considering the choices of others EXamples of decision-theoretic and game-theoretic situations Noncooperative game theory is a set of tools that is used model the behavior or choices of players when the payoffs of a choice depends on the choice of other players Recognized payoff interdependency gives rise to interdependent decision making. The optimal choice of a player will depend on her expectation of the choices of others playing the same game
Why game theory? • Game-theoretic situation: payoff interdependency or strategic interdependency. • Payoff interdependency exists when the optimal choice by an agent depends on the actions of others. • The mutual dependency of payoffs on the actions by all players defines a game-theoretic situation. In contrast, decisiontheoretic situations are when there is no recognized payoff interdependence: the payoffs or profits of an action are determined without considering the choices of others. • Examples of decision-theoretic and game-theoretic situations • Noncooperative game theory is a set of tools that is used to model the behavior or choices of players when the payoffs of a choice depends on the choice of other players. • Recognized payoff interdependency gives rise to interdependent decision making. The optimal choice of a player will depend on her expectation of the choices of others playing the same game
Foundations and principles The basic elements of a game Any game has 4 elements which define the structure of of the game 1. players: the identity of those playing the game 2. rules: the rules of the game specify three things:(a) the timing of all players moves; (b) the actions available to a player at each of her moves; and ( c) the information that a player has at each move 3. outcomes: the outcome of a game depends on what each player does when it is her turn to move. The set of outcomes is determined by all of the possible combinations of actions taken by players 4. payoffs the payoffs of the game represent the players preferences over the outcomes of the game
Foundations and principles • The basic elements of a game • Any game has 4 elements which define the structure of of the game. • 1. players: the identity of those playing the game. • 2. rules: the rules of the game specify three things: (a) the timing of all players’ moves; (b) the actions available to a player at each of her moves; and (c) the information that a player has at each move. • 3. outcomes: the outcome of a game depends on what each player does when it is her turn to move. The set of outcomes is determined by all of the possible combinations of actions taken by players. • 4. payoffs: the payoffs of the game represent the players’ preferences over the outcomes of the game
Types of games(1) Classify games on the basis of (a the timing of moves and(b) uncertainty about the payoffs of rivals Static game: each player moves once, and when a player moves she does so not knowing the action of her rivals. Such a game is sometimes called a strategic game Dynamic game: players move sequentially and have some idea, perhaps imperfect, about what their rivals have done; that is, players are at least partially aware of the actions taken by others so far Such games are often called extensive games
Types of games(1) • Classify games on the basis of (a) the timing of moves and (b) uncertainty about the payoffs of rivals. • Static game: each player moves once, and when a player moves she does so not knowing the action of her rivals. Such a game is sometimes called a strategic game. • Dynamic game: players move sequentially and have some idea, perhaps imperfect, about what their rivals have done; that is, players are at least partially aware of the actions taken by others so far. Such games are often called extensive games