6 Game Theory: Cheating Students I believe that you both have vandalized the school.You have two optionsYou can remain silent and I can issue you a 1 hour detentionYou can confess and implicate your partner, you will be granted immunity and your partner will get a 4 hour Saturday SchoolIf both confess, that will save me the trouble of gathering evidence so you both will get a 2 hour detention
7 Game Theory: Vandalizing Students Student B DecisionConfessRemain SilentStudent B gets 4 hour Sat.Student A goes freeStudent B gets 2 hourStudent A gets 2 hourConfessStudent ADecisionStudent B goes freeStudent A get 4 hour Sat.Go freeRemain Silent
8 Oligopolies and Game Theory Each firm has an incentive to cheat to benefit at the other firm’s expenseWhen both firms cheat, both are worse off then they would have been if neither cheated
9 Pepsi and Coke Game Theory What’s Coca Cola’s best decision?What’s Pepsi’s best decision?What is the decision that will ultimately be made? (The Nash Equilibrium)
11 CollusionAgreement among producers to divide market, set prices, or limit productionIllegal in the United States (antitrust laws)
12 CartelsFormal organization of producers that act in unison after a collusion agreementIllegal in the United States
13 An Arms-Race Game Arm Disarm U.S. at risk USSR at risk Decision of the United States (U.S.)ArmDisarmU.S. at riskUSSR at riskU.S. at risk and weakUSSR safe and powerfulArmDecisionof theSoviet UnionU.S. safe and powerfulUSSR at risk and weakU.S. safeUSSR safe(USSR)Disarm
14 How the Size of an Oligopoly Affects the Market Outcome As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market.The price approaches marginal cost, and the quantity produced approaches the socially efficient level.