Flashcards in Game Theory Deck (9)

Loading flashcards...

1

## 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.

2

## Prisoners Dilemma problem

###
X

If Y confesses, I confess

If Y denies, I confess

X's dominant strategy is CONFESS

Y

If X confesses, I confess

If X denies, I confess

Y's dominant strategy is CONFESS

BOTH OF THEM CONFESSING IS THE NASH EQUILIBRIUM

3

## What happens when they both don't have a dominant strategy?

### See if they match

4

## 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)

5

## 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)

6

## 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: 700

Total Market Sales: 875

CR4 = 250 + 200 + 150 + 100 / 875

x 100

CR4 = 700 / 875 X 100 = 80%

7

## 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

EX.

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

If 1000

8

## Definition of the industry or market

###
Several firms actually operate in several markets

ex. Proctor and gamble

9