Rules, Strategies, Payoffs, and equilibrium a Economic situations are treated as games The rules of the game state who can do what and when they can do it a players strategy is a plan for actions in each possible situation in the game
9-6 Rules, Strategies, Payoffs, and Equilibrium Economic situations are treated as games. Economic situations are treated as games. • The rules of the game state who can do what, of the game state who can do what, and when they can do it. and when they can do it. • A player's A player's strategy strategy is a plan for actions in is a plan for actions in each possible situation in the game. each possible situation in the game
Prisoner's dilemma Confess Don't Confess Confess (-8,-8) (0,-15) Don't Confess(-15, 0)
9-7 Prisoner’s Dilemma Confess Don’t Confess 1 2 Confess Don’t Confess ( -8, -8) ( -15, 0) ( 0, -15) ( -1, -1)
Rules, Strategies, Payoffs, and equilibrium a Economic situations are treated as games a players payoff is the amount that the player wins or loses in a particular situation In a game o a players has a dominant strategy if that players best strategy does not depend on what other players do
9-8 Rules, Strategies, Payoffs, and Equilibrium Economic situations are treated as games. Economic situations are treated as games. • A player's A player's payoff is the amount that the is the amount that the player wins or loses in a particular situation player wins or loses in a particular situation in a game. in a game. • A players has a A players has a dominant strategy dominant strategy if that if that player's best strategy does not depend on player's best strategy does not depend on what other players do. what other players do
Nash Equilibrium a Occurs when each player 's strategy is optimal, given the strategies of the other players. a player's best response(or best strategy)is the strategy that maximizes that players payoff, given the strategies of other players. A Nash equilibrium is a situation in which each player makes his or her best response
9-9 Nash Equilibrium Occurs when each player's strategy is Occurs when each player's strategy is optimal, given the strategies of the other optimal, given the strategies of the other players. players. • A player's A player's best response best response (or best strategy) is (or best strategy) is the strategy that maximizes that player's the strategy that maximizes that player's payoff, given the strategies of other players. payoff, given the strategies of other players. • A Nash equilibrium Nash equilibrium is a situation in which is a situation in which each player makes his or her best response. each player makes his or her best response
A Sequential Game New Firm Chooses New Firm Enters New firm does not enter Monopoly Monopoly Chooses Chooses High Price Low Price High Price oW Price Monopoly gets Monopoly gets Monopoly gets Monopoly gets $3, New firm gets $0, New firm gets $5, New firm gets $2, New firm gets $2 -$1(S millions) $o
9-10 A Sequential Game New Firm Chooses New Firm Enters New Firm Does Not Enter Monopoly gets $3, New firm gets $2 High Price Low Price Monopoly Chooses Monopoly gets $5, New firm gets $0 Monopoly gets $2, New firm gets $0 Monopoly Chooses Monopoly gets $0, New firm gets –$1 High Price Low Price ($ millions)