Game Theory and Strategic Behavior Flashcards
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Read the first 7 Game Theory and Strategic Behavior flashcards as text
What is a cartel in the context of oligopoly markets?
Answer: A formal agreement among independent firms to coordinate output levels and prices
A cartel is a cooperative arrangement in which competing firms formally agree to restrict output and raise prices, collectively acting like a monopoly to earn higher profits.
In sequential games, what does 'first-mover advantage' refer to?
Answer: The strategic benefit a player gains by being the first to commit to an action in a sequential game
In a sequential game, the first mover can commit to a strategy that shapes the choices available to later movers, often resulting in a favorable strategic position.
In a repeated prisoner's dilemma, which strategy can sustain cooperation over many rounds?
Answer: Tit-for-tat: cooperate in the first round, then mirror the opponent's previous move each subsequent round
Tit-for-tat rewards cooperation with cooperation and punishes defection immediately, creating an incentive for both players to sustain mutual cooperation across repeated interactions.
What is price leadership in an oligopoly?
Answer: A practice where the dominant firm sets a price that rival firms tacitly follow
Price leadership is an informal coordination mechanism where one firm (often the largest or lowest-cost producer) sets a price and other firms follow, achieving a coordinated outcome without explicit collusion.
Which of the following best describes a zero-sum game?
Answer: A game in which one player's gain is exactly equal to another player's loss, so total payoffs sum to zero
In a zero-sum game, the total amount of value is fixed, so any gain by one player comes at an equal cost to another — unlike most economic games where cooperation can create mutual gains.
What is the key distinction between a dominant strategy and a Nash Equilibrium?
Answer: A dominant strategy is optimal regardless of opponents' choices; a Nash Equilibrium is a profile of strategies from which no player wants to deviate unilaterally
A dominant strategy is individually best no matter what opponents do; a Nash Equilibrium is a combination of strategies (not necessarily dominant for each player) where no one benefits from a unilateral change.
Why is OPEC most accurately described as a cartel in economic terms?
Answer: Member countries coordinate production quotas to restrict output and influence global oil prices
OPEC functions as a cartel because its members collectively agree on production levels in order to control supply, raise world oil prices, and increase member revenues above what competitive markets would yield.