Module Micro 29 Econ 65 Game Theory KRUGMANS

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Module Micro: 29 Econ: 65 Game Theory KRUGMAN'S MICROECONOMICS for AP* Margaret Ray and

Module Micro: 29 Econ: 65 Game Theory KRUGMAN'S MICROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: • How oligopoly can be analyzed using

What you will learn in this Module: • How oligopoly can be analyzed using game theory. • The concept of the prisoners’ dilemma. • How repeated interactions among oligopolists can result in collusion in the absence of any formal agreement.

Game Theory • Game Theory: study of how interdependent decision makers make choices.

Game Theory • Game Theory: study of how interdependent decision makers make choices.

Non-Cooperative Games • Each player competes to maximize individual payoffs and ignores the effects

Non-Cooperative Games • Each player competes to maximize individual payoffs and ignores the effects of his/her action on the payoffs received by the rival.

Terms to Know • Payoff matrix • Dominant strategy • Nash equilibrium

Terms to Know • Payoff matrix • Dominant strategy • Nash equilibrium

Prisoner’s Dilemma • Each player has an incentive to choose an action that benefits

Prisoner’s Dilemma • Each player has an incentive to choose an action that benefits his/herself at the other player’s expense. • Both players are then worse off than if they had acted cooperatively. The payoff matrix below summarizes the strategies and outcomes. The payoffs are measured as years in prison, so smaller numbers are preferred. Crook 2 Crook 1 Confess Silent #1: 5 years #2: 5 years #1: 1 year #2: 20 years #1: 2 years #2: 1 year #2: 2 years

Repeated Interaction and Tacit Collusion • Repeated interaction can lead to strategic behavior •

Repeated Interaction and Tacit Collusion • Repeated interaction can lead to strategic behavior • Tit for tat strategy • Tacit Collusion

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