Game Theory (Nash Equilibrium) | Market Structure

Explore the concept of Nash equilibrium in game theory with this informative presentation, which delves into the strategic decision-making process of players in order to achieve a balanced outcome. Gain insights into how rational individuals can reach a point where no player has an incentive to deviate from their chosen strategy.

1. GAME THEORY:
NASH
EQUILIBRIUM
Economics

2. Game Theory
◦Game theory is used to explain the interdependence
in oligopolistic market structure.
◦An oligopoly is a market structure dominated by few
firms.
◦The businesses are so dependent on one another
that decisions made by one will have an immediate
impact on other firms.

3. Nash Equilibrium
◦It is the best strategy or response for each player
given the strategy of the other player.
◦Neither can be better off in terms of profit by
choosing a different option from the equilibrium.

4. Example
oThe following payoff matrix shows the outcomes when two companies,
A and B, choose to advertise or not to advertise.
N.B. The first number in each cell (colour red) refers to payoff (profit) of
company A, while the second (colour purple) is for company B, if each
advertises or does not advertise.
Company B
Advertise Don’t Advertise
Company A Advertise $15m $8m $18m $4m
Don’t Advertise$7m $18m$20m $7m

5. A’s strategy if B advertises
Company B
Advertise
(column 3)
Don’t Advertise
(column 4)
Company A Advertise $8m$18m $4m
Don’t Advertise$7m $18m$20m $7m
$15m
Best strategy for A: Advertise
(higher profit of $15m)
N.B. The first number in each cell (colour red) refers to payoff (profit)
of company A, while the second (colour purple) is for company B, if
each advertises or does not advertise.

6. A’s strategy if B does not
advertise
Company B
Advertise
(column 3)
Don’t Advertise
(column 4)
Company A Advertise $8m $18m $4m
Don’t Advertise$7m $18m $7m
$15m
$20m
Best strategy for A: Don’t
Advertise (higher profit of $20m)
N.B. The first number in each cell (colour red) refers to payoff (profit)
of company A, while the second (colour purple) is for company B, if
each advertises or does not advertise.

7. Is A’s strategy a dominant strategy?
Company B
Advertise
(column 3)
Don’t Advertise
(column 4)
Company A Advertise $8m $18m $4m
Don’t Advertise$7m $18m $7m$20m
$15m
Best strategy for A: Advertise if B
advertises and Don’t Advertise if
B does not advertise.
N.B. The first number in each cell (colour red) refers to payoff (profit)
of company A, while the second (colour purple) is for company B, if
each advertises or does not advertise.
No dominant
strategy for A

8. B’s strategy if A advertises
Company B
Advertise
(column 3)
Don’t Advertise
(column 4)
Company A Advertise (row 3) $18m $4m
Don’t Advertise
(row 4)
$7m $18m $7m$20m
$15m
Best strategy for B: Advertise
(higher profit of $8m)
$8m
N.B. The first number in each cell (colour red) refers to payoff (profit)
of company A, while the second (colour purple) is for company B, if
each advertises or does not advertise.

9. B’s strategy if A does not advertise
Company B
Advertise
(column 3)
Don’t Advertise
(column 4)
Company A Advertise (row 3) $18m $4m
Don’t Advertise
(row 4)
$7m $7m$20m
$15m
Best strategy for B: Advertise
(higher profit of $18m)
$8m
N.B. The first number in each cell (colour red) refers to payoff (profit)
of company A, while the second (colour purple) is for company B, if
each advertises or does not advertise.
$18m

10. Does B have a dominant strategy?
Company B
Advertise
(column 3)
Don’t Advertise
(column 4)
Company A Advertise (row 3) $18m $4m
Don’t Advertise
(row 4)
$7m $7m$20m
$15m
Best strategy for B: Advertise
whether A advertises or not.
$8m
N.B. The first number in each cell (colour red) refers to payoff (profit)
of company A, while the second (colour purple) is for company B, if
each advertises or does not advertise.
$18m
A has a dominant
strategy

11. Where is the Nash equilibrium?
Company B
Advertise
(column 3)
Don’t Advertise
(column 4)
Company A Advertise (row 3) $18m $4m
Don’t Advertise
(row 4)
$7m $7m$20m
$15m
Nash equilibrium: A advertises,
given that B advertises.
$8m
N.B. The first number in each cell (colour red) refers to payoff (profit)
of company A, while the second (colour purple) is for company B, if
each advertises or does not advertise.
$18m