Flashcards in Game Theory Deck (9)
The Prisoners Dilemma
2 individuals, X and Y.
-X and Y have been caught together committing a crime. Conclusive evidence, that X and Y are guilty of the "less serious crime"
-There is "weak" evidence that X and Y are guilty of a "more serious" crime
-How do authorities convict X and Y of the "more serious crime"?
-Authorities separate X and Y, and offer a deal. "We have enough evidence to send you to jai for 1 year. However if you confuses to the "more serious crime" and implicate your partner, you will get 3 months. Your partner gets 20 years. If you both confess, each of you get 15 years.
Prisoners Dilemma problem
If Y confesses, I confess
If Y denies, I confess
X's dominant strategy is CONFESS
If X confesses, I confess
If X denies, I confess
Y's dominant strategy is CONFESS
BOTH OF THEM CONFESSING IS THE NASH EQUILIBRIUM
What happens when they both don't have a dominant strategy?
See if they match
Cooperation or Competition?
1. The tendency to cooperate is greater for small number of sellers than for larger numbers
2. The tendency to cooperate is greater for producers of similar products than for producers of differentiated products
3. The tendency to cooperate is greater in growing markets
4. The tendency to cooperate msg greater when entry barriers are higher
5. Tendency to cooperate is greater when the market has a dominant firm
OPEC (Canada is not in it because US, Saudi Arabia is the dominant one in the cartel)
What are the Measures of Concentration ?
How much of a market is controlled by a small number of firms
1) Concentration Ratio
2) Herfindahl - Herschman Index (HHI)
Measures of Concentration - Concentration Ratio
Four firm concentration ratio (CR4)
Is the percentage of the value of sales accounted for by the FOUR largest firms
Firm 1: 250
Firm 2: 200
Firm 3: 150
Firm 4: 100
Total Market Sales: 875
CR4 = 250 + 200 + 150 + 100 / 875
CR4 = 700 / 875 X 100 = 80%
Measures of Concentration - Hirshman Index
HHI4 = (Sales 1 / Market Sales x 100) 2squared
+ (Sales 2 / Market Sales X 100) 2squared
+ (Sales 3 / Market Sales X 100) 2squared
+ (Sales 4 / Market Sales X 100) 2squared
HHI (250/875 x 100) 2squared + (200/875 x 100)2squared + (150/875 x 100)2squared + (100/875 x 100)2squared = ?
If the HHI is GREATER than 1800, the industry is considered HIGHLY CONCENTRATED
Definition of the industry or market
Several firms actually operate in several markets
ex. Proctor and gamble