econ ch 13 Game Theory and competitive Strategy

• What is a game in economic terms?

  A situation where players make strategic decisions based on the others' potential actions
• What is a dominant strategy?

  A strategy that is optimal regardless of what the opponent does
• What defines a Nash Equilibrium?

  Each player chooses the best response given the strategies of others-no incentive to deviate
• How does a maximin strategy work?

  It maximizes the minimum payoff a player can earn-conservative decision-making
• What is a pure strategy?

  A strategy in which a specific action is chosen with certainty
• What is a mixed strategy?

  A strategy where actions are chosen randomly based on assigned probabilities
• What problem does the prisoners' dilemma illustrate?

  Rational individuals may not cooperate, even if it's their mutual best interest
• What is the tit-for-tat strategy in repeated games?

  Start by cooperating; then replicate your opponent's last move
• When does cooperation become sustainable in repeated games?

  When the game is repeated indefinitely or the end is uncertain
• What is a sequential game?

  A game in which players move one after another and respond to previous moves
• What tool is used to analyze sequential games?

  A decision tree (extensive form)
• What makes a threat effective in strategic games

  It must be credible and believable to the opponent
• How can a firm create a credible commitment

  By taking irreversible actions that limit future choices
• What is entry deterrence?

  Strategic moves by incumbents to prevent new firms from entering a market
• What is the winner's curse in common-value auctions?

  The winning bidder likely overestimates the item's value and overpays
• Which auction format is most vulnerable to the winner's curse?

  Sealed-bid auctions
• What is the best strategy in a second-price auction?

  Bid your true reservation price-it's a dominant strategy
• What's the main difference between private-value and common-value auctions?

  -Private-value bidders know their own valuation

  -Common-value item's true value is uncertain but the same for all
• Why do open auctions often yield higher revenue in common-value setting?

  Because bidders can learn from other and reduce overbidding
• How can government use strategic trade policy?

  By Subsidizing domestic firms to deter foreign entry and shift market outcomes