Managerial Economics - Lecture 10 PDF

Preview

Summary

MG465 - Daniel Gottlieb...

Description

Managerial Economics Lecture 10 – Game Theory: Dynamic Games In dynamic games, players have an opportunity to act after learning the actions of other players. In a sequential game, players act one at a time. These can be represented by game trees. In dynamic games, actions and strategies differ. Action: a move that a player makes at a specified point. Strategy: a full plan that specifies which action a player will make conditional on every possible situation. Game trees have decision nodes which indicate which player’s turn it is. Branches indicate all possible actions and payoffs indicate how much each player gains after all players have moved. In these games, it is important to distinguish between credible and non-credible threats that agents may makes. Dynamic games are solved using backwards induction. It looks at how other players will respond to each action. You always choose the action with the highest payoff, as we have assumed rationality. First vs Second Mover Advantage In games where commitment is important, there is generally a first mover advantage. Decisions involving quantity generally tend to give a first mover advantage, while price usually offers a second mover advantage through the ability to undercut the incumbent. Sometimes backward induction fails to predict how real people play - The description of payoffs may be wrong (more than just money) - People may fail to think in terms of contingencies (a future event or circumstance which is possible but cannot be predicted with certainty) - People may think that others will fail to think in terms of contingencies....