Game Theory and Strategic Behavior Flashcards
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Read the first 7 Game Theory and Strategic Behavior flashcards as text
In the Cournot model of oligopoly, firms compete by simultaneously choosing their:
Answer: Quantities of output, taking rivals' quantities as given
In the Cournot model, each firm chooses how much to produce assuming its rivals' output levels are fixed, and market price adjusts to clear the total quantity produced.
In the Bertrand model of oligopoly with homogeneous products, what is the equilibrium market price?
Answer: A price equal to marginal cost, with firms earning zero economic profit
Bertrand competition drives price down to marginal cost because any firm that prices above MC can be undercut by a rival, so the only stable equilibrium is P = MC, identical to the perfectly competitive outcome.
What is the defining feature of mutual interdependence in oligopolistic markets?
Answer: Each firm's pricing and output decisions significantly impact and are influenced by the decisions of rival firms
Mutual interdependence means that in a concentrated market, what one firm does has a meaningful effect on rivals and vice versa, so firms must anticipate competitors' reactions when making decisions.
In game theory, a player's 'strategy' is best defined as:
Answer: A complete contingency plan specifying what action the player will take in every possible situation
A strategy is a full decision rule — not just a single action — that maps every possible situation or information set a player might face to a specific action.
Which of the following is an example of a non-cooperative game?
Answer: Two firms independently and simultaneously choosing prices in a competitive market
A non-cooperative game is one in which players make decisions independently without binding agreements; two firms independently setting prices exemplifies this because no coordination or enforceable contract is involved.
How does heavy advertising spending by established oligopolists act as a barrier to entry for potential new competitors?
Answer: Established advertising creates strong brand loyalty, forcing new entrants to spend heavily just to make consumers aware of their product
Years of advertising by incumbents build brand recognition and consumer loyalty that new entrants cannot instantly replicate, requiring them to incur large sunk advertising costs before gaining a foothold — raising the effective cost of entry.
What is a mixed strategy in game theory?
Answer: A probability distribution over available pure strategies, where the player randomly selects an action according to those probabilities
A mixed strategy involves a player randomizing over two or more pure strategies according to chosen probabilities, making their behavior unpredictable and preventing opponents from exploiting a deterministic pattern.