Deck 9: Game Theory and Strategic Behavior

Question 1

Game theory can be used to analyze nonprice competition in oligopolistic markets.

Answer 1

True

Question 2

Game theory is particularly useful in analyzing multiple-move decision-making situations.

Answer 2

False

Question 3

One criticism of game theory is that, by considering only the best outcome of each strategy, it views the world in an excessively optimistic light.

Answer 3

False

Question 4

Game theory is concerned with identifying optimal strategies in conflict situations.

Question 5

The prisoners' dilemma refers to a situation in which both players cooperate in determining a strategy.

Question 6

A tit-for-tat strategy cannot be successfully employed in repeated games.

Question 7

The prisoner's dilemma provides an explanation for price wars among oligopolists.

Question 8

The prisoner's dilemma is unable to explain the seeming inability of most commodity cartels to maintain high prices.

Question 9

Firms in a cartel "cheat" by selling more output than they are supposed to.

Question 10

A credible threat is one that is not believable.

Question 11

Tit-for-tat is a strategy that cannot be applied in repeated games.

Question 12

Decision trees represent strategies and outcomes in the form of a branching diagram.

Question 13

The technique of backward induction involves starting at the beginning of a decision tree and working through to the end.

Question 14

The strategy of being the first to enter a new market may result in a "first mover" advantage.

Question 15

Government industrial policies and strategies can be described using game theory.

Question 16

A market has only two sellers. They are both trying to decide on a pricing strategy. If both firms charge a high price, then each firm will experience a 10% increase in profits. If both firms charge a low price, then each firm will experience a 5% decrease in profits. If Firm 1 charges a low price and Firm 2 charges a high price, then Firm 1 will experience a 6% increase in profits and Firm 2 will experience a 2% decrease in profits. If Firm 2 charges a low price and Firm 1 charges a high price, then Firm 2 will experience a 7% increase in profits and Firm 1 will experience a 3% decrease in profits.
(I) Construct a payoff matrix for this game.
(ii) Determine whether each firm has a dominant strategy and, if it does, identify the strategy.
(iii) Determine the optimal strategy for each firm.
(iv) Determine the Nash equilibrium.
(v) Is this a prisoners' dilemma? How do you know?

Question 17

A market has only two sellers. They are both trying to decide on a pricing strategy. If both firms charge a high price, then each firm will experience a 5% decrease in profits. If both firms charge a low price, then each firm will experience a 2% increase in profits. If Firm 1 charges a high price and Firm 2 charges a low price, then Firm 1 will experience a 1% increase in profits and Firm 2 will experience a 4% increase in profits. If Firm 2 charges a high price and Firm 1 charges a low price, then Firm 2 will experience a 3% increase in profits and Firm 1 will experience a 4% increase in profits.
(i) Construct a payoff matrix for this game.
(ii) Determine whether each firm has a dominant strategy and, if it does, identify the strategy.
(iii) Determine the optimal strategy for each firm.
(iv) Determine the Nash equilibrium.
(v) Is this a prisoners' dilemma? How do you know?

Question 18

A market has only two sellers. They are both trying to decide on a pricing strategy. If both firms charge a high price, then each firm will experience a 5% increase in profits. If both firms charge a low price, then each firm will experience a 3% increase in profits. If Firm 1 charges a high price and Firm 2 charges a low price, then Firm 1 will experience a 1% increase in profits and Firm 2 will experience a 6% increase in profits. If Firm 2 charges a high price and Firm 1 charges a low price, then Firm 2 will experience a 2% increase in profits and Firm 1 will experience a 7% increase in profits.
(i) Construct a payoff matrix for this game.
(ii) Determine whether each firm has a dominant strategy and, if it does, identify the strategy.
(iii) Determine the optimal strategy for each firm.
(iv) Determine the Nash equilibrium.
(v) Is this a prisoners' dilemma? How do you know?

Question 19

A market has only two sellers. They are both trying to decide on a pricing strategy. If both firms charge a high price, then each firm will experience a 5% increase in profits. If both firms charge a low price, then each firm will experience a 3% decrease in profits. If Firm 1 charges a high price and Firm 2 charges a low price, then Firm 1 will experience a 4% decrease in profits and Firm 2 will experience a 6% increase in profits. If Firm 2 charges a high price and Firm 1 charges a low price, then Firm 2 will experience a 5% decrease in profits and Firm 1 will experience a 7% increase in profits.
(i) Construct a payoff matrix for this game.
(ii) Determine whether each firm has a dominant strategy and, if it does, identify the strategy.
(iii) Determine the optimal strategy for each firm.
(iv) Determine the Nash equilibrium.
(v) Is this a prisoners' dilemma? How do you know?

Question 20

A pair of duopolists, Firm A and Firm B, manufacture seasonal toys. Both are planning their pricing strategies for the coming holiday season. The firms will choose between a low price (Low) and a high price (High). Firm A has a more flexible production and distribution system than Firm B and is therefore able to begin the season with one pricing strategy and then adopt a different strategy in mid-season. While Firm B is unable to change its strategy in mid-season, it can delay making a choice until after Firm A has announced its prices for the first part of the season. The firms' alternatives and payoffs are displayed in the decision tree diagram. Use this information to determine each firm's optimal strategy and anticipated payoff.

Question 21

A pair of duopolists, Firm A and Firm B, manufacture seasonal toys. Both are planning their pricing strategies for the coming holiday season. The firms will choose between a low price (Low) and a high price (High). Firm A has a more flexible production and distribution system than Firm B and is therefore able to begin the season with one pricing strategy and then adopt a different strategy in mid-season. While Firm B is unable to change its strategy in mid-season, it can delay making a choice until after Firm A has announced its prices for the first part of the season. The firms' alternatives and payoffs are displayed in the decision tree diagram. Use this information to determine each firm's optimal strategy and anticipated payoff.

Question 22

A pair of duopolists, Firm A and Firm B, manufacture seasonal toys. Both are planning their pricing strategies for the coming holiday season. The firms will choose between a low price (Low) and a high price (High). Firm A has a more flexible production and distribution system than Firm B and is therefore able to begin the season with one pricing strategy and then adopt a different strategy in mid-season. While Firm B is unable to change its strategy in mid-season, it can delay making a choice until after Firm A has announced its prices for the first part of the season. The firms' alternatives and payoffs are displayed in the decision tree diagram. Use this information to determine each firm's optimal strategy and anticipated payoff.

Question 23

A pair of duopolists, Firm A and Firm B, manufacture seasonal toys. Both are planning their pricing strategies for the coming holiday season. The firms will choose between a low price (Low) and a high price (High). Firm A has a more flexible production and distribution system than Firm B and is therefore able to begin the season with one pricing strategy and then adopt a different strategy in mid-season. While Firm B is unable to change its strategy in mid-season, it can delay making a choice until after Firm A has announced its prices for the first part of the season. The firms' alternatives and payoffs are displayed in the decision tree diagram. Use this information to determine each firm's optimal strategy and anticipated payoff