1. KRUGMAN'S MICROECONOMICS for AP* Game Theory Margaret Ray and David Anderson Micro: Econ: 29 65 Module

2. What you will learn in this Module : How oligopoly can be analyzed using game theory. The concept of the prisoners’ dilemma. How repeated interactions among oligopolists can result in collusion in the absence of any formal agreement.

3. Game Theory Game Theory: study of how interdependent decision makers make choices.

4. Non-Cooperative Games Each player competes to maximize individual payoffs and ignores the effects of his/her action on the payoffs received by the rival.

5. Terms to Know Payoff matrix-diagram showing payoffs of strategies Dominant strategy-best option regardless other player’s actions Nash equilibrium-each chooses strategy best for them (do not have to be the same for both )

6. Prisoner’s Dilemma Each player has an incentive to choose an action that benefits his/herself at the other player’s expense. Both players are then worse off than if they had acted cooperatively. The payoff matrix below summarizes the strategies and outcomes. The payoffs are measured as years in prison, so smaller numbers are preferred. Crook 2 ConfessSilent Crook 1 Confess #1: 5 years #2: 5 years #1: 1 year #2: 20 years Silent #1: 20 years #2: 1 year #1: 2 years #2: 2 years

7. Repeated Interaction and Tacit Collusion Repeated interaction can lead to strategic behavior Tit for tat strategy-”I’ll do today whatever you did yesterday” Tacit Collusion-cooperate or act together w/o a formal agreement to limit production and raise prices in order to increase profits.