Microeconomics Course E

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MicroeconomicsCourse E

• John Hey

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Chapter 30

• GAME THEORY
• Up to now we have considered situations in which
  individuals take decisions independently of the
  decisions of others.
• Today we consider situations of interdependence
  games.
• It will be useful when we examine duopoly.

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GAMES

• In general many players and many decisions.
• We start by considering games in which there are
  two players (1 and 2) each with two decisions (A
  and B).
• Their payoffs depend on the decisions of both
  players.

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A Dominating Choice

• A player has a dominating choice if it is best
  independently of the choice of the other player.

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A Nash Equilibrium

• A combination of choices in a game is called a
  Nash equilibrium if neither player wants to
  change his or her choice given the choice of the
  other player.
• Does a Nash Equilibrium always exist?

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Pareto Dominance

• When one outcome is better for both players than
  some other outcome, we say that the first outcome
  Pareto Dominates the second.
• We note that the Nash Equilibrium (AA) in the
  Prisoners Dilemma is Pareto Dominated by BB.

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A Continuum of Choices

• When we consider duopoly, the two players do not
  choose just from two choices but choose the value
  of some variable.
• We have exactly the same concepts.

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Chapter 30

• A player has a dominating choice if this choice
  is best independently of the choice of the other.
• A combination of choices in a game is called a
  Nash equilibrium if neither player wants to
  change his or her choice given the choice of the
  other player
• Games may have no Nash Equilibria (in pure
  strategies), a unique Nash Equilibrium of several
  Nash equilibria.

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Chapter 30

• Goodbye!

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