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Exam 10: Game Theory and Competitive Strategy

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Question 1

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What is the dilemma in the prisoner's dilemma? What is the key assumption about behavior? Suggest one way to overcome the dilemma.

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The general dilemma is that optimal indi...

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Question 2

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Predatory pricing is a practice of deliberately pricing at a loss in order to bankrupt a rival. (a) Is predatory pricing rational? (b) Should predatory pricing be illegal? Explain why or why not

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Predatory pricing is an antitrust offens...

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Consider the following game: Two players must choose one of three options: rock, paper, or scissors. The winner is determined as follows: Paper slaps rock (and wins); rock crushes scissors (and wins); scissors cuts paper (and wins). If both players choose the same option, it results in a draw. Does the game have a dominant strategy? Does it have an optimal pure strategy?

The following table lists the payoffs of two firms adopting three possible advertising strategies: Table 10-5 $\begin{array}{l}\quad\quad\quad\quad\quad\quad\quad\quad\text { Firm } 2\\\begin{array} { | c | c | c | c | } \hline \text { Firm 1 } & \text { High } & \text { Medium } & \text { Low } \\\hline \text { High } & 3,2 & 4,1 & 5,0 \\\hline \text { Medium } & 1,6 & 5,4 & 3,3 \\\hline \text { Low } & 0,4 & 5,5 & 6,2 \\\hline\end{array}\end{array}$ -Refer to Table 10-5. The (Nash) equilibrium pair of strategies for Firms 1 and 2 is:

Define the concept of Nash equilibrium. Why is it important?

How does finite competition differ from infinite competition between rival firms?

The following table lists the payoffs for Firm 1 and Firm 2 from three possible pricing strategies: Table 10-3 $\begin{array}{l}\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Firm } 2\\\begin{array} { | c | c | c | c | } \hline \text { Firm 1 } & \text { High } & \text { Medium } & \text { Low } \\\hline \text { High } & 3,1 & 4,2 & 2,0 \\\hline \text { Medium } & 2,3 & 5,5 & 3,4 \\\hline \text { Low } & 5,4 & 7,5 & 5,2 \\\hline\end{array}\end{array}$ -Refer to Table 10-3. Identify Firm 1's dominant strategy.

List and explain the various forms of oligopolistic cooperation, which may benefit all firms, and lead to greater profitability.

Game theory offers insight into:

A game tree diagram is used to represent:

Why does the strategy of tit-for-tat support cooperative equilibrium?

What is the role of information in a strategic game?

Provide an example of a competitive situation where there is a second-mover advantage.

The following matrix gives the payoffs for Firm 1 and Firm 2 from three possible pricing strategies: Table 10-1 $\begin{array}{l}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Firm } 2\\\begin{array} { | c | c | c | c | } \hline \text { Firm 1 } & \text { High } & \text { Medium } & \text { Low } \\\hline \text { High } & 5,3 & 7,1 & 6,2 \\\hline \text { Medium } & 2,5 & 5,4 & 2,3 \\\hline \text { Low } & 4,4 & 3,3 & 4,2 \\\hline\end{array}\end{array}$ -Refer to Table 10-1. The payoff table represents a:

The following table shows the payoffs for Firm 1 and Firm 2 in a zero-sum game: Table 10-2 $\begin{array}{c}\quad\quad\quad\text { Firm2}\\\begin{array}{|c|c|r|}\hline\text { Firm 1 } & \text { C1 } & {\text { C2 }} \\\hline \text { R1 } & 4,5 & 10,4 \\\hline \text { R2 } & 2,8 & 8,7\\\hline\end{array}\end{array}$ -Refer to Table 10-2. Identify the correct statement.

The following table lists the payoffs for Firm 1 and Firm 2 from three possible pricing strategies: Table 10-3 $\begin{array}{l}\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Firm } 2\\\begin{array} { | c | c | c | c | } \hline \text { Firm 1 } & \text { High } & \text { Medium } & \text { Low } \\\hline \text { High } & 3,1 & 4,2 & 2,0 \\\hline \text { Medium } & 2,3 & 5,5 & 3,4 \\\hline \text { Low } & 5,4 & 7,5 & 5,2 \\\hline\end{array}\end{array}$ -Refer to Table 10-3. Identify Firm 2's dominant strategy.

A mixed strategy:

List and briefly explain the main entry deterrence policies that an oligopoly firm might employ to prevent other firms from entering a market.

For the payoff table listed, determine the equilibrium outcome. Does either firm have a dominant strategy? $\begin{array}{c}\quad\quad\quad\text { Firm } 2\\\begin{array} { | c | c | c | } \hline \text { Firm 1 } & \text { Low price } & \text { High price } \\\hline \text { Low price } & 28,12 & 48,20 \\\hline \text { High price } & 20,30 & 30,22 \\\hline\end{array}\end{array}$

How do constant-sum games and non-constant-sum games differ from each other? Give an example of each.