Game Theory Exercises for Microeconomics II
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Tayssir BenhafaiedhGame Theory Exercises for Microeconomics II
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Tayssir BenhafaiedhCommon questions
Powered by AILowering the individual contribution cost "c" can transform the game from a prisoners’ dilemma into a cooperative Nash equilibrium because reduced costs increase the individual payoff for contributing, thereby aligning individual incentives with the collective good. When the cost is lower than the individual benefit of the public good provision, contributing becomes the dominant strategy for both players, naturally leading to a Nash equilibrium where both contribute .
In a repeated prisoners’ dilemma, the potential for future interactions increases the likelihood of cooperation because it allows for strategies like tit-for-tat, where players can reward cooperation and punish defection over successive rounds. This repeated interaction fosters trust as players recognize the long-term benefits of cooperating over consistently non-cooperative strategies, which would lead to worse outcomes cumulatively .
In the sequential-move game with Alice and Bob, the Nash equilibrium can be found by backward induction. Alice chooses the strategy anticipating Bob's optimal response in each case. When cooperation is introduced, and Bob credibly commits to cooperating, the cooperative solution may lead to mutual benefits surpassing those of non-cooperative strategies. This cooperation changes the Nash equilibrium, potentially aligning both players' interests with payoffs that would otherwise not occur in a purely competitive scenario .
In the simultaneous strategy game between Value Jet and Delta Airlines, the Nash equilibrium occurs when both firms choose strategies that are best responses to each other. For example, if Delta decides to be accommodating, the best response for Value Jet might be to enter aggressively, depending on the payoffs from the profit table. To determine the exact strategies constituting the Nash equilibrium, one needs to analyze the profit matrix to see which pair of strategies (e.g., small scale entry for Value Jet and accommodating response from Delta) maximizes both firms' payoffs given the other's choice .
By moving first with a public statement of entering on a small scale, Value Jet can influence Delta’s response, potentially leading Delta to be accommodating rather than engaging in a price war. This strategic move can enhance Value Jet’s profit by limiting competition and extracting more favorable terms. The exact increase in profitability would depend on the specifics of the modified payoffs in this sequential game setting. However, the advantage comes from Value Jet's ability to alter the strategic landscape, forcing Delta to react to its commitment .
For the bidding strategy ($11, $11) to be a Nash equilibrium, both participants, Jack and Jill, must believe that any deviation from bidding $11 would either result in losing the auction or gaining less profit. This situation occurs if the perceived benefits of winning at a lower bid (given both can bid up to $11) do not outweigh the risk of losing the auction entirely or incurring a higher cost for the same win outcome. The understanding is that with full borrowing capability, both will reach this bidding ceiling .
If Alice's payoff for choosing strategy A changes from 0 to 4, it may alter her strategy choices significantly, potentially affecting Bob’s subsequent decisions. This change in payoffs can disrupt the existing Nash equilibrium by making A a more attractive option, potentially leading Alice to select A more frequently and impacting the overall dynamics of Bob's response concerning payoffs from his decisions .
Identifying dominated strategies—those strategies that are worse than another strategy regardless of what the opponent does—helps refine the strategy set by eliminating these options from consideration. This simplification can make it easier to identify Nash equilibria by reducing the complexity of the decisions to those strategies that are not dominated, thereby focusing on rationalizable choices that are more likely to be played in equilibrium .
Commitment plays a crucial role in public goods provision strategies by enabling individuals or groups to credibly assure others that they will follow through on their actions, which can influence others' responses and hence the outcome of the game. In the context of Nash equilibrium, commitment helps to stabilize cooperation as players are more willing to contribute knowing that others are committed to doing so, overcoming the free-rider problem that typically exists in such settings .
If Firm 1 credibly commits to an aggressive strategy first, it alters the strategic environment, potentially intimidating Firm 2 to adopt a passive strategy to avoid intense competition, leading to a new Nash equilibrium where Firm 1 aggressively expands market share and Firm 2 remains passive. Firm 2’s response shifts in response to Firm 1's preemptive move to maximize its own payoff under the changed conditions .