ECON 1201 Lecture Notes - Lecture 24: Nash Equilibrium, Strategic Dominance, Oligopoly
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Document Summary
Game theory: the study of behavior in situations of interdependence; a way of predicting outcomes in strategic situations like oligopolies. When each firm has an incentive to cheat but both are worse off if both cheat, the situation is known as a prisoner"s dilemma. The game is based on two premises: Each player has an incentive to choose an action that benefits itself at the other player"s expense. When both players act in this way, both are worse off than if they had acted cooperatively. A dominant strategy: a strategy that is a player"s best action regardless of the action taken by the other player. Depending on the payoffs, a player may or may not have a dominant strategy. Players who don"t take their interdependence into account arrive at a nash, or. But if a game is played repeatedly, players may engage in strategic behavior, sacrificing short-run profit to influence future behavior.
