ECO 201 Lecture Notes - Lecture 23: Best Response, Strategic Dominance, Substitute Good
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O(cid:374)e fir(cid:373)"s (cid:272)hoi(cid:272)e affe(cid:272)ts the profits of the other fir(cid:373)s. I(cid:374) ge(cid:374)eral, fir(cid:373)s (cid:272)a(cid:374) (cid:862)(cid:272)ooperate(cid:863) to a(cid:272)hie(cid:448)e the (cid:373)o(cid:374)opol(cid:455) out(cid:272)o(cid:373)e & split profits, or (cid:272)o(cid:373)pete, driving down price & profit. Economists use a technique called game theory to understand haw firms make decisions when their decisions affect each other. The priso(cid:374)er"s dile(cid:373)(cid:373)a da(cid:374)(cid:374)(cid:455) rusty have sobbed the bank. Police want to get one of them to. If you confess your buddy does(cid:374)"t, (cid:455)ou get pro(cid:271)atio(cid:374) & he goes to jail for (cid:884)(cid:882) years. If you both confess, you both to jail for 6 years. If you both deny involvement, you both go to jail for (cid:883) year. Best respo(cid:374)se : the a(cid:272)tio(cid:374) that (cid:373)a(cid:454)i(cid:373)izes a pla(cid:455)er"s (cid:449)ell-being given the action taken by his/hers opponent. (cid:883), identify u(cid:374)derli(cid:374)e ea(cid:272)h pla(cid:455)er"s best respo(cid:374)se to the a(cid:272)tio(cid:374) of the other pla(cid:455)er. * then first # in each ordered pair is the payoff for the row player.
