PPT5 Game Theory analysis presentation .pptx

game theory

1. Game theory Amit P Jha

2. Bonnie & Clyde

3. Bonnie & Clyde Indian Version

4. Prisoners‘ Dilemma 5 years jail for Clyde , 5 years jail for Bonnie 1 year jail for Clyde , 15 years jail or Bonnie 15 years jail for Clyde , 1 year jail for Bonnie 2 years jail for Clyde , 2 years jail for Bonnie Bubbly’s Strategic Choices Bunty’s Strategic Choices Confess Not Confess Confess Not Confess

5. Game Theory

6. Game Theory The study of how people (may be firm) behave in strategic situation

7. Game Theory The study of how people (may be firm) behave in strategic situation

8. Nash Equilibrium A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen. Each firm is doing the best it can given what its competitors are doing... If you are at Nash Equilibrium, you have no incentive to deviate unilaterally

9. John Nash

10. Movie

11. Prisoners‘ Dilemma 5 years jail for Clyde , 5 years jail for Bonnie 1 year jail for Clyde , 15 years jail or Bonnie 15 years jail for Clyde , 1 year jail for Bonnie 2 years jail for Clyde , 2 years jail for Bonnie Bubbly’s Strategic Choices Bunty’s Strategic Choices Confess Not Confess Confess Not Confess

12. Prisoners‘ Dilemma -5 , -5 -1 , -15 -15 , -1 -2 , -2 Bubbly’s Strategic Choices Bunty’s Strategic Choices Confess Not Confess Confess Not Confess

13. Prisoners’ Dilemma and Nash equilibrium

14. Prisoners‘ Dilemma Nash Equilibrium (NE) [If you are at NE, you will not deviate unilaterally] -5 , -5 -1 , -15 -15 , -1 -2 , -2 Bubbly’s Strategic Choices Bunty’s Strategic Choices Confess Not Confess Confess Not Confess

15. Prisoners‘ Dilemma (Dominant Strategy) [ Confess dominates over Not Confess ] -5 , -5 -1 , -15 -15 , -1 -2 , -2 Bubbly’s Strategic Choices Bunty’s Strategic Choices Confess Not Confess Confess Not Confess

16. Prisoners‘ Dilemma Better Choice [ But, incentive to cheat ] -5 , -5 -1 , -15 -15 , -1 -2 , -2 Bubbly’s Strategic Choices Bunty’s Strategic Choices Confess Not Confess Confess Not Confess

17. Prisoners‘ Dilemma in Business Duopoly Firm A’s has Strategic Choices Firm B’s has Strategic Choices High Production Low Production A and B are two (only two) producers of a good (say water) High Production will lead to lower prices and vice versa

18. Prisoners‘ Dilemma Duopoly 1 mn , 1 mn 2 mn , 0.75 mn 0.75 mn , 2 mn 1.5 mn , 1.5 mn Firm B’s Strategic Choices Firm A’s Strategic Choices High Production Low Production High Production Low Production

19. Prisoners‘ Dilemma [Nash Equilibrium] Duopoly [ High Production dominates over Low Production ] [ No Incentive to deviate ] 1 mn , 1 mn 2 mn , 0.75 mn 0.75 mn , 2 mn 1.5 mn , 1.5 mn Firm B’s Strategic Choices Firm A’s Strategic Choices High Production Low Production High Production Low Production

20. Prisoners‘ Dilemma [Better Choice] Duopoly [Better, but Incentive to cheat] 1 mn , 1 mn 2 mn , 0.75 mn 0.75 mn , 2 mn 1.5 mn , 1.5 mn Firm B’s Strategic Choices Firm A’s Strategic Choices High Production Low Production High Production Low Production

21. Prisoners‘ Dilemma [Collusion] Duopoly It is better for firms to collude. But, it is easy and rational to defect . Collusion  occurs when rival firms agree to work together – e.g. setting higher prices in order to make greater profits.

22. Prisoners‘ Dilemma [Collusion] Duopoly When is collusion possible? Legally Binding Contracts / Penalty (but, of course, it is almost always illegal) Repeated Games / Threat / Tit-for-tat

23. Prisoners‘ Dilemma Other Examples Common Resource

24. Prisoners‘ Dilemma Other Examples Arms Race

25. Another Game

26. Rock Paper Scissors

27. Rock Paper Scissors (RPS) Rock Paper Scissors is a zero sum game In technical terms: RPS is a two person zero sum game

28. Rock Paper Scissors

29. Prisoners’ Dilemma // Rock Paper Scissors Pure Strategy // Mixed Strategy In Prisoners’ Dilemma there is a pure strategy Nash Equilibrium In Rock Paper Scissors there isn’t a pure strategy Nash Equilibrium In Rock Paper Scissors there is a mixed strategy Nash Equilibrium

30. Importance of Game Theory