Game Theory

• What is the main focus of game theory?

  Analyzing strategic interactions among players
• How did game theory evolve from mathematics?

  It explained firm behavior in oligopolies
• Who is a notable figure in game theory?

  John Nash
• What did John Nash win in 1994?

  Nobel prize for economics
• What scenario does the Prisoners’ Dilemma illustrate?

  Two prisoners making decisions without communication
• What happens if both prisoners refuse to deal?

  They are sentenced to 5 years each
• What is a dominant strategy in game theory?

  A player's best strategy regardless of others' actions
• What would happen if both prisoners confess?

  Both receive a 10-year sentence
• How do firms in an oligopoly make decisions?

  Based on the actions of their rivals
• What is the outcome if both firms choose low output?

  Both make £2 million profit
• What is the Nash Equilibrium in this context?

  Both firms consistently choose high output
• What is collusion in the context of firms?

  An illegal agreement to maximize joint profits
• Why do firms remain at the Nash Equilibrium?

  Changing strategies could lead to zero profits
• What decisions can the Nash Equilibrium model help analyze?

  Pricing, output, and advertising strategies
• What are the possible outcomes for Cinemas X & Y?

  Profits based on pricing strategies
• What happens if Firm Y sets high prices?

  Firm X maximizes profits by setting high prices
• What happens if Firm Y sets low prices?

  Firm X maximizes profits by setting low prices
• What is Firm X's dominant strategy?

  To set high prices regardless of Firm Y
• What is the optimum outcome for both firms?

  Both firms setting low prices
• How might the optimum outcome be achieved?

  Through collusion between the firms
• What is the danger for a firm trying to achieve the optimum outcome?

  Risk of being caught and penalized for collusion
• What are the advantages of being the first mover?

  Establishing brand recognition and market share
• What are the disadvantages of being the first mover?

  Higher risks and potential for failure