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Managerial Economics Exam 2: Chapter 10
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Terms in this set (22)
Game Theory
Study of how people behave in interactive strategic situations.
Strategic Decisions
Decisions in which each person, in deciding what actions to take, must consider how others might act or respond to that action, because others' actions will affect your end result.
Strategically
Because the number of firms in an oligopolistic market is small, each firm must act __________.
Profit
Each firm knows that its ________ depends not only on how much it produces but also on how much the other firms produce.
Game Environments
Players' planned decisions are called strategies.
Payoffs to players are the profits or losses resulting from strategies.
Order of play is important.
Frequency of rival interaction.
Order of Play
1. Simultaneous
2. Sequential
Simultaneous
Each player makes decisions without knowledge of other players' decisions.
Sequential
One player observes its rival's move prior to selecting a strategy.
Frequency of Rival Interaction
1. One-shot game
2. Repeated game
One-Shot Game
Game is played once.
Repeated Game
Game is played more than once; either a finite or infinite number of interactions.
Payoff Matrix
Displays results of different combinations of different strategies.
Used to illustrate player interdependence.
Normal Form Game
Exact set of players.
Each player's strategy set or feasible actions consist of a finite number of strategies.
Dominant Strategy
In a Simultaneous-Move, One-Shot Game, a strategy resulting in the highest payoff regardless of the opponent's action.
Two-Player Nash Equilibrium
Condition describing the set of strategies in which no player can improve her payoff by unilaterally changing her own strategy, given that the other player's strategy doesn't change.
Insights to Managerial Decision Making
Look for your dominant strategies.
Put yourself in your rival's shoes, determine if she/he has a dominant strategy, and if so, make your choice based upon the likelihood that she/he will pursue that dominant strategy.
Coordination Games
Games result in higher profits by each firm when they coordinate.
Examples:
Industry standards:
-CDs, DVDs, Blu-Rays
-USBs
National standards:
-electric current
-traffic laws
Key Insights
Not all games are games of conflict.
Communication can help solve coordination problems.
Sequential multiple moves can help solve coordination problems.
Prisoners' Dilemma
The __________ _________ is a particular game between two captured prisoners that illustrates why cooperation can be difficult to attain even if it is mutually beneficial.
Perceived
Cooperation is difficult to achieve and/or maintain, because cooperation may not be in the ____________ best interest of the individual player.
Dominant Strategy
The best strategy for a player to follow regardless of the strategies chosen by the other players.
Randomized
In some games where no pure strategy Nash equilibrium exists, players may find it in there interest to engage in _________ strategies.
Ex: Rock, paper, scissors.
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