Documentos de Académico
Documentos de Profesional
Documentos de Cultura
1
Game Theory Definition
The study of strategic decision making.
More formally, it is the study of
mathematical models of conflict and
cooperation between intelligent rational
decision-makers.
2
Other Applications of Game Theory
National Defense – Terrorism and Cold War
Movie Release Dates and Program
Scheduling
Auctions http://en.wikipedia.org/wiki/Spectrum_auction
http://en.wikipedia.org/wiki/United_States_2008_wireless_spectrum_auction
4
Grey’s Anatomy vs. The Donald
'Grey' move has NBC red Peacock shifts 'Apprentice' back
By Nellie Andreeva
5
Game Theory and Movie Release Dates
The Imperfect Science of Release Dates
New York Times
6
Game Theory and Movie Release Dates
(cont.)
Last December featured one of the most dramatic games of
chicken in recent memory, when two films starring Leonardo
DiCaprio were both slated to open on Christmas weekend.
Ultimately, Miramax blinked first, moving the release of Martin
Scorsese's ''Gangs of New York'' five days earlier and ceding
the holiday to the other DiCaprio film, DreamWorks' ''Catch Me
if You Can.'' ''We didn't think about moving,'' says Terry Press,
the head of marketing for DreamWorks. ''We had been there
first, and 'Catch Me if You Can' was perfect for that date.'' This
year, DreamWorks chose to schedule a somber psychological
drama, ''House of Sand and Fog,'' for the day after Christmas,
deferring a bit to Miramax. ''I don't want our reviews to run on
the same day as 'Cold Mountain,''' Press says.
Ever wonder why a movie theater shows a preview of an
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upcoming movie that is to be released in 2 years?
Other Applications of Game Theory
National Defense – Terrorism and Cold War
Movie Release Dates and Program
Scheduling
Auctions http://en.wikipedia.org/wiki/Spectrum_auction
http://en.wikipedia.org/wiki/United_States_2008_wireless_spectrum_auction
9
Game Theory Secrets for Parents
Wall Street Journal July, 2014
Credible Punishments: In game theory as in parenting, you have to deliver on your
threats, like actually turning off the TV if you said you were going to, even if it
punishes you too. Joshua Gans, an economist at the University of Toronto and the
author of "Parentonomics," offers advice for gaining a credible reputation at home.
When his children were young and would disobey, he would say, "I'm thinking of a
punishment." It's much easier to pretend to think of a punishment than to come up
with a new one every time, he notes—or, worse, to issue a noncredible threat in the
heat of the moment. ("That's it, I'm canceling Christmas!") Once he earned his
credibility, he found that he had only to close his eyes and count to 10, and his
children would spring into action.
The Bedtime Ultimatum: For shortening the bedtime routine with several children to
tuck in, one parent advises using an ultimatum game of take-it-or-leave-it. Before
bed, just have the children play rocks, paper, scissors and allow the winning child to
choose the book. If the others don't agree with the choice, no one gets a story.
Sleep Training 101: Game theory can work from the earliest days of parenthood.
Prof. Nalebuff applies the concept of backward induction to help new mothers get
some sleep. If a mother repeatedly gets up in the middle of the night with the child, he
explains, eventually the child will only respond to the mother comforting him. Instead,
mothers should look forward and reason backward: If you ever want your husband to
get up in the middle of the night, then you have to get him involved at the very start.
Everyone, it seems, needs to be sleep trained. 10
Game Theory Terminology
Simultaneous Move Game – Game in
which each player makes decisions
without knowledge of the other players’
decisions (ex. Cournot or Bertrand
Oligopoly).
Sequential Move Game – Game in which
one player makes a move after observing
the other player’s move (ex. Stackelberg
Oligopoly).
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Game Theory Terminology
Strategy – In game theory, a decision rule
that describes the actions a player will
take at each decision point.
Normal Form Game – A representation of
a game indicating the players, their
possible strategies, and the payoffs
resulting from alternative strategies.
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Example 1: Prisoner’s Dilemma
(Normal Form of Simultaneous Move Game)
Martha’s options
17
Example 1: Nash?
Martha’s options
20
EXAMPLE 3: Entry into a fast food market:
Is there a Nash Equilibrium(ia)?
Yes, there are 2 – (Enter, Burger King’s options
Don’t Enter) and (Don’t
Enter, Enter). Implies, no
need for a dominant Enter Don’t Enter
strategy to have NE. Skaneateles Skaneateles
McDonalds’ Enter Skaneateles PBK = -40 PBK = 0
Options PM = -30 PM = 50
Don’t Enter PBK = 40 PBK = 0
Skaneateles PM = 0 PM = 0
Manager’s Monitor W: 1 W: -1
Options M: -1 M: 1
Don’t Monitor W: -1 W: 1
M: 1 M: -1
Definition:
A strategy whereby a player
randomizes over two or more
available actions in order to keep
rivals from being able to predict his
or her actions.
23
Calculating Mixed Strategy
EXAMPLE 4: Monitoring Workers
Manager randomizes (i.e. monitors with
probability PM) in such a way to make the
worker indifferent between working and
shirking.
Worker randomizes (i.e. works with
probability Pw) in such a way as to make
the manager indifferent between
monitoring and not monitoring.
24
Example 4: Mixed Strategy
Worker’s options
Work Shirk
PW 1-PW
Manager’s Monitor W: 1 W: -1
Options PM M: -1 M: 1
Don’t Monitor W: -1 W: 1
1-PM M: 1 M: -1
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Manager selects PM to make Worker
indifferent between working and
shirking (i.e., same expected payoff)
Worker’s expected payoff from working
PM*(1)+(1- PM)*(-1) = -1+2*PM
Worker’s expected payoff from shirking
PM*(-1)+(1- PM)*(1) = 1-2*PM
Worker’s expected payoff the same from working and
shirking if PM=.5. This expected payoff is 0 (-1+2*.5=0
and 1-2*.5=0). Therefore, worker’s best response is to
either work or shirk or randomize between working
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and shirking.
Worker selects PW to make Manager indifferent
between monitoring and not monitoring.
Manager’s expected payoff from monitoring
PW*(-1)+(1- PW)*(1) = 1-2*PW
Manager’s expected payoff from not
monitoring
PW*(1)+(1- PW)*(-1) = -1+2*PW
Manager’s expected payoff the same from monitoring
and not monitoring if PW=.5. Therefore, the manager’s
best response is to either monitor or not monitor or
randomize between monitoring or not monitoring .
27
Nash Equilibrium of Example 4
Worker works with probability .5 and
shirks with probability .5 (i.e., PW=.5)
Manager monitors with probability .5 and
doesn’t monitor with probability .5 (i.e.,
PM=.5)
Neither the Worker nor the Manager can increase
their expected payoff by playing some other
strategy (expected payoff for both is zero). They
are both playing a best response to the other
player’s strategy. 28
Example 4A: What if costs of
Monitoring decreases and Changes
the Payoffs for Manager
Worker’s options
Work Shirk
Manager’s Monitor W: 1 W: -1
Options M: -1 M: 1 1.5
-.5
Don’t Monitor W: -1 W: 1
M: 1 M: -1
29
Nash Equilibrium of Example 4A
where cost of monitoring decreased
Worker works with probability .625 and
shirks with probability .375 (i.e., PW=.625)
Same as in Ex. 5, Manager monitors with
probability .5 and doesn’t monitor with
probability .5 (i.e., PM=.5)
The decrease in monitoring costs does not change
the probability that the manager monitors. However, it
increases the probability that the worker works.
30
Example 5: Mixed Strategy and Tennis
http://www.fuzzyyellowballs.com/introducing-the-fyb-strategy-quiz/
Game:
Server’s Possible Strategies:
(Serve Left , Serve Right)
http://www.youtube.com/watch?v=CemLiSI5ox8
34
Example 6: A Beautiful Mind
Other Student’s Options
36
Potential Entrant
Example 7
Don’t Enter Enter
Incumbent Firm
Potential Entrant: 0
Incumbent: +10
PIM2 PID1
Potential Entrant
and so on…. The present discounted
PE2 value of profits for the
Suppose each period the incumbent incumbent and potential
sets the optimal price as a monopolist entrant depends on their
and maximizes the present discounted strategies.
value of profits which is +10. and so on…. 38
Potential Entrant
Example 7
Don’t Enter Enter
Incumbent Firm
Potential Entrant: 0
Incumbent: +10
41
Potential Entrant
Example 7
Don’t Enter Enter
Incumbent Firm
Potential Entrant: 0
Incumbent: +10
Chipotle Chipotle
43
Big Ten Burrito
Chipotle Chipotle
45
Example 9: Limit Pricing
When a firm sets it price and
output so that there is not enough
demand left for another firm to
enter the market profitably.
46
Incumbent (suppose monopolist)
Example 9:
PE: -1 +5 0 0 -1 +5 0 0
Inc: 8+1 8+5 8+8 8+10 10+1 10+5 10+8 10+10
Note: Incumbent’s profits are $10 per period if set monopoly price and $8 per period
if set lower price. What price the incumbent sets initially does not influence second
period profits for incumbent or potential entrant. For simplicity, second period
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payoffs are not discounted.
Incumbent (suppose monopolist)
Example 9:
PE: -1 +5 0 0 -1 +5 0 0
Inc: 8+1 8+5 8+8 8+10 10+1 10+5 10+8 10+10
Note: Incumbent’s profits are $10 per period if set monopoly price and $8 per period
if set lower price. What price the incumbent sets initially does not influence second
period profits for incumbent or potential entrant. For simplicity, second period
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payoffs are not discounted.
Incumbent (suppose monopolist)
Example 9a:
Note: Incumbent’s profits are $10 per period if set monopoly price and $8 per period
if set lower price. What price the incumbent sets initially does not influence second
period profits for incumbent or potential entrant. For simplicity, second period
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payoffs are not discounted.
Incumbent (suppose monopolist)
Example 9a:
Note: Incumbent’s profits are $10 per period if set monopoly price and $8 per period
if set lower price. What price the incumbent sets initially does not influence second
period profits for incumbent or potential entrant. For simplicity, second period
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payoffs are not discounted.
Questions:
1. Can you think of examples where the price the
incumbent sets the first period could influence
second period profits of the incumbent and
perhaps the entrant?
2. Are there other actions the incumbent can take
prior to the potential entrant’s entry decision that
could influence this decision? (R&D, Capital
Investment, Lobbying, etc.)
51
Predatory Pricing
Definition: When a firm first lowers its price in order to
drive rivals out of business (and scare off potential
entrants), and then raises its price when its rivals exit
the market.
52
Example 10: The Hold-Up Problem
Dan Conlin
Invest in Firm Don’t Invest
Specific Knowledge
59
Example 12: Hold-Up Problem
MIPS
Accept Reject
MIPS: p-75 60-75= -15
Silicon Graphics: 100-p 0
63
Cournot Oligopoly Example
1. Few firms in market serving many
customers.
2. Firms produce either differentiated
or homogeneous products.
3. Each firm believes rivals will hold
their output constant if it changes its
output.
4. Barriers to entry exist.
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Numerical Example of Cournot Oligopoly
65
What if the firms perfectly collude?
What total output should they produce?
100
Q=40. Can’t have more
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profits than what a
80 monopolist would.
70
60
50
D
40
30
20 MC
10
Q
0
0 10 20 30 40 50 60 70 80 90 100
MR
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Suppose firms collude where both firms
produce an output of 20 (i.e., Q1=Q2=20)
100 Firm 1’s Profits = 60*20-20*20=800
90
80
Firm 2’s Profits = 60*20-20*20=800
70
60
50
D
40
30 =AVC=ATC
20 MC
10
Q
0
0 10 20 30 40 50 60 70 80 90 100
67
Why might you expect that the firms will not be able to
collude in this manner?
If Firm 1 thinks Firm 2 will produce 20, then Firm 1 can
increase his profits to 900 if produce 30.
100
Firm 1’s Profits = 50*30-20*30=900
90
80
Firm 2’s Profits = 50*20-20*20=600
70
60
50
D
40
30
=AVC=ATC
20 MC
10
Q
0
0 10 20 30 40 50 60 70 80 90 100
68
Nash Equilibrium
A situation in which neither firm has
an incentive to change its output
given the other firm’s output. (Also
called Cournot Equilibrium.)
53.33
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Cournot Equilibrium compared
to Perfect Collusion
Cournot Equilibrium
Q1=26.67 , Firm 1 Profits = 713
Q2=26.67 , Firm 2 Profits = 713
Perfect Collusion
Q1=20 , Firm 1 Profits = 800
Q2=20 , Firm 2 Profits = 800
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What if Firms Interact Repeatedly:
Infinitely Repeated Interaction
Suppose Firm 1 thinks Firm 2 won’t deviate from Q2=20 if
Firm 1 doesn’t deviate from collusive agreement of Q1=20
and Q2=20. In addition, Firm 1 thinks Firm 2 will produce at
an output of 80 in all future periods if Firm 1 deviates from
collusive agreement of Q1=20 and Q2=20.
74
My All Time Favorite example of
how expectations are formed
In the June 5 memo, Summerfield K. Johnston Jr. and Henry A.
Schimberg, the chief executive and the president of Coca-Cola
Enterprises, respectively, said the bottler's plan is to "succeed
based on superior marketing programs and execution rather
than the short-term approach of buying share through price
discounting."
"This is a first step to disengagement," said Andrew Conway, an
analyst in New York for Morgan Stanley & Co. "Coke and
Pepsi are out to improve profitability for the category, not
destroy it, so this would bode for a stabilization."
For all the signals of a truce, though, Coca-Cola Enterprises'
memo could just as easily be seen as throwing down the
gauntlet. Messrs. Johnston and Schimberg said in the memo
that should "the competition" view the attempt to raise prices
"as an opportunity to gain share through predatory pricing, we
will, as we have in the past, respond immediately."
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Bertrand Oligopoly
1. Few firms in market serving many
customers.
2. Firms produce a homogeneous product
at a constant marginal cost (need not
actually be the case).
3. Firms engage in price competition and
react optimally to prices charged by
competitors.
4. Consumers have perfect information and
there are no transaction costs.
5. Barriers to entry exist.
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What if Firm 1 and Firm 2 choose price and react
optimally to price charged by other firm?
Will firms be able to collude on a price of $60?
100
Firms could not collude
90
on a price of $60
80 because each firm would
70 have incentive to
60 undercut other firm. In
50
D the end, you would
40 expect both firms to set
30
a price of $20 (equal to
MC) and haveMC
20
zero
10
profits. Q
0
0 10 20 30 40 50 60 70 80 90 100
77
Using Game Theory to Devise
Strategies in Oligopolies that
Increase Profits
Examples:
1. Price Matching- advertise a price and promise to
match any lower price offered by a competitor.
100
90
Bertrand Oligopoly
80
70 In the end, you would
60 expect both firms to set a
50
D price of $20 (equal to MC)
40
30 and have zero profits.
20 MC
10
Q
0
0 10 20 30 40 50 60 70 80 90 100
78
Using Game Theory to Devise
Strategies in Oligopolies that
Increase Profits
Examples:
1. Price Matching- advertise a price and promise
to match an lower price offered by a
competitor. In Bertrand example, perhaps each
firm would set a price of $60 and say will
match.
2. Induce Brand Loyalty – frequent flyer program
3. Randomized pricing – inhibits consumers
learning as to who offers lower price and
reduces ability of competitors to undercut
price.
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