Answered: Game theory has a wide range of…

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter10: Monopolistic Competition And Oligopoly

Section: Chapter Questions

Problem 13PAE

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Game theory has a wide range of applicationsin business and economics. e.g. market coordination, pricing strategy, advertising decision etc. Now suppose that your firm competes against another firm for customers. You and your rivals know that your products will be obsolete at the end of the year and must simultaneously determine whether or not to advertise. In this type of business, the effect of advertising is not to entice customers to buy the product but to induce them to switch among the products of different firms.

Given the following pay-off matrix;

FIRM A	Strategy	FIRM B
		Advertise	NOT Advertise
	Advertise	P4,000 / P4,000	P20,000 / P1,000
	Don’t Advertise	P1,000 / P2,000	P10,000 / P10,000

Using a simultaneous move – one shot game routine, determine the following;

• Dominant strategy

• Nash equilibrium

• Under the Nash equilibrium condition, what is the optimum pay-off for each player or firm?

• What is Nash Equilibrium??

Definition Definition Economic decision-making framework that analyzes how different players optimize their outcomes with given pay-offs corresponding to their available strategies. The assumptions of game theory are: The number of players or competitors are finite/limited; All participants are rational The rules of the game are known to every player; and Each participant has a finite set of actions. A common way in which game theory is presented as an ( m x n ) matrix in which m represents the strategies of row player and n represents the strategies of column player. There are several limitations of game theory: Many businesses have a large number of competitors, and selecting an optimal strategy in these circumstances is difficult; Real-life business operating environments are full of uncertainty and difficult to model as a game theory; and The assumption of rationality and utility maximization isn't always an accurate portrayal of human nature.

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