Description
Describes about game theory and also explains prisoner's dilemma with the help of an example.
Game Theory
GAME THEORY AND THE ECONOMICS OF COOPERATION
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Game theory is the study of how people behave in strategic situations. Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action.
GAME THEORY AND THE ECONOMICS OF COOPERATION
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Because the number of firms in an Oligopolistic market is small, each firm must act strategically. Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce.
The Prisoners’ Dilemma
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The prisoners’ dilemma provides insight into the difficulty in maintaining cooperation. Often people (firms) fail to cooperate with one another even when cooperation would make them better off. The prisoners’ dilemma is a particular “game” between two captured prisoners (Clyde and Bonnie) that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.
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This is a classic trust game, designed to demonstrate the concept of "win/win". It is based on the "Prisoners' Dilemma" in which two criminals who are arrested after a crime are immediately separated into two police cells. The police know that they committed the crime but have no evidence. Each prisoner is approached individually and told that if they confess and implicate the other person, they will get a significantly reduced sentence.
The dilemma for each prisoner is as follows :?
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If I confess, I get a reduced sentence and my colleague gets a full sentence. If I trust him not to confess and keep quiet, but he confesses, I get the full sentence. If I trust him not to confess and keep quiet, and he does the same, we can both walk free. Of course, if we both confess, we both get the full sentence! Unfortunately, we cannot communicate now we are in the cells and I do not know whether he will go which way.
The Prisoners’ Dilemma
Bonnie’ s Decision
Confess Bonnie gets 10 years
Remain Silent Bonnie gets 20 years
Confess Clyde’s Decision Remain Silent Clyde gets 10 years Bonnie goes free Clyde goes free Bonnie gets 1 year
Clyde gets 20 years
Clyde gets 1 year
Copyright©2003 Southwestern/Thomson Learning
The Prisoners’ Dilemma
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The dominant strategy is the best strategy for a player to follow regardless of the strategies chosen by the other players. Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player. Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production, high prices, and monopoly profits.
An Arms-Race Game
Decision of the United States (U.S.)
Arm U.S. at risk Arm
Decision of the Soviet Union (USSR)
Disarm U.S. at risk and weak
USSR at risk
USSR safe and powerful
U.S. safe and powerful
U.S. safe
Disarm
USSR at risk and weak USSR safe
Copyright©2003 Southwestern/Thomson Learning
An Advertising Game
Marlboro’ s Decision
Advertise Marlboro gets $3 billion profit Advertise Camel’s Decision Don’t Advertise Camel gets $3 billion profit Marlboro gets $5 billion profit Camel gets $2 billion profit
Don’t Advertise Marlboro gets $2 billion profit Camel gets $5 billion profit Marlboro gets $4 billion profit Camel gets $4 billion profit
Copyright©2003 Southwestern/Thomson Learning
Why People Sometimes Cooperate
?
Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a onetime gain.
doc_164415788.ppt
Describes about game theory and also explains prisoner's dilemma with the help of an example.
Game Theory
GAME THEORY AND THE ECONOMICS OF COOPERATION
?
?
Game theory is the study of how people behave in strategic situations. Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action.
GAME THEORY AND THE ECONOMICS OF COOPERATION
?
?
Because the number of firms in an Oligopolistic market is small, each firm must act strategically. Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce.
The Prisoners’ Dilemma
?
?
?
The prisoners’ dilemma provides insight into the difficulty in maintaining cooperation. Often people (firms) fail to cooperate with one another even when cooperation would make them better off. The prisoners’ dilemma is a particular “game” between two captured prisoners (Clyde and Bonnie) that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.
?
?
?
This is a classic trust game, designed to demonstrate the concept of "win/win". It is based on the "Prisoners' Dilemma" in which two criminals who are arrested after a crime are immediately separated into two police cells. The police know that they committed the crime but have no evidence. Each prisoner is approached individually and told that if they confess and implicate the other person, they will get a significantly reduced sentence.
The dilemma for each prisoner is as follows :?
?
?
?
?
If I confess, I get a reduced sentence and my colleague gets a full sentence. If I trust him not to confess and keep quiet, but he confesses, I get the full sentence. If I trust him not to confess and keep quiet, and he does the same, we can both walk free. Of course, if we both confess, we both get the full sentence! Unfortunately, we cannot communicate now we are in the cells and I do not know whether he will go which way.
The Prisoners’ Dilemma
Bonnie’ s Decision
Confess Bonnie gets 10 years
Remain Silent Bonnie gets 20 years
Confess Clyde’s Decision Remain Silent Clyde gets 10 years Bonnie goes free Clyde goes free Bonnie gets 1 year
Clyde gets 20 years
Clyde gets 1 year
Copyright©2003 Southwestern/Thomson Learning
The Prisoners’ Dilemma
?
?
?
The dominant strategy is the best strategy for a player to follow regardless of the strategies chosen by the other players. Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player. Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production, high prices, and monopoly profits.
An Arms-Race Game
Decision of the United States (U.S.)
Arm U.S. at risk Arm
Decision of the Soviet Union (USSR)
Disarm U.S. at risk and weak
USSR at risk
USSR safe and powerful
U.S. safe and powerful
U.S. safe
Disarm
USSR at risk and weak USSR safe
Copyright©2003 Southwestern/Thomson Learning
An Advertising Game
Marlboro’ s Decision
Advertise Marlboro gets $3 billion profit Advertise Camel’s Decision Don’t Advertise Camel gets $3 billion profit Marlboro gets $5 billion profit Camel gets $2 billion profit
Don’t Advertise Marlboro gets $2 billion profit Camel gets $5 billion profit Marlboro gets $4 billion profit Camel gets $4 billion profit
Copyright©2003 Southwestern/Thomson Learning
Why People Sometimes Cooperate
?
Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a onetime gain.
doc_164415788.ppt