Deck 10: Game Theory and Competitive Strategy

Question 1

Which of the following is true of a dominant strategy?

A)A dominant strategy guarantees a player a higher payoff than its competitor.
B)A dominant strategy calls for a contingent course of action.
C)A dominant strategy is the best response to any strategy that the other player might select.
D)A dominant strategy minimizes the other player's payoff.
E)A player has to have a dominant strategy in order to earn a profit.

Answer 1

C

Question 2

The following matrix gives the profits (in thousands of dollars)for Firm 1 and Firm 2 from high-price,medium-price,and low-price pricing strategies:
Table 10-1

Which of the following is true of a zero-sum game?

A)The value of the game will be equal to zero.
B)Each player always has a dominant strategy.
C)One player will gain at the expense of the other player.
D)There are only two players in a zero-sum game.
E)One player's payoff is independent of the other player's actions.

Answer 2

C

Question 3

The following matrix gives the profits (in thousands of dollars)for Firm 1 and Firm 2 from high-price,medium-price,and low-price pricing strategies:
Table 10-1

A player involved in a one-shot game will:

A)cooperate with its rivals due to the threat of punishment.
B)follow punitive strategies.
C)take actions aimed at creating a reputation with his rivals.
D)make moves that will maximize the present payoff.
E)follow a tit-for-tat strategy.

Answer 3

D

Question 4

The following matrix gives the profits (in thousands of dollars)for Firm 1 and Firm 2 from high-price,medium-price,and low-price pricing strategies:
Table 10-1

Refer to Table 10-1.Identify Firm 1's dominant strategy.

A)Firm 1's dominant strategy is the medium-price strategy.
B)Firm 1 does not have a dominant strategy.
C)Firm 1's dominant strategy is the high-price strategy.
D)Firm 1's dominant strategy could be low-price or medium-price depending on its bargaining power.
E)Firm 1's dominant strategy is the low-price strategy.

Question 5

Two firms are poised to enter the retail market.Entering the market will be profitable for one firm only if the other firm does not enter the market.This is an example of:

A)simultaneous game with perfect information.
B)a repeated game with contingent strategies.
C)bargaining game with multiple equilibria
D)a game with a first-mover advantage.
E)a non-zero-sum game.

Question 6

A game tree diagram is used to represent:

A)a non-zero-sum game.
B)a Nash equilibrium.
C)a simultaneous game.
D)a dominant strategy equilibrium.
E)a sequential game.

Question 7

In a bargaining setting with perfect information:

A)backward induction determines the equilibrium outcome.
B)there may be many possible equilibrium outcomes.
C)the outcome is an equilibrium in pure strategies.
D)the situation amounts to a constant-sum game.
E)the outcome is a dominant strategy equilibrium.

Question 8

In a competitive situation involving the adoption of a common standard by all firms in the industry:

A)each player should always adopt his own preferred standard to maximize profit.
B)each player will adopt the strategy that maximizes collective profits.
C)a dominant strategy equilibrium will result.
D)there will be multiple equilibria with different strategies adopted by each player.
E)coordination will reduce the payoffs to each player.

Question 9

The following matrix gives the profits (in thousands of dollars)for Firm 1 and Firm 2 from high-price,medium-price,and low-price pricing strategies:
Table 10-1

Refer to Table 10-1.The payoff matrix showing the firms' pricing strategies represents a:

A)prisoner's dilemma.
B)constant-sum game.
C)dominant strategy equilibrium
D)sequential game.
E)tit-for-tat strategy.

Question 10

The key assumption used in game theory is that each player:

A)pursues his own self-interest.
B)is not affected by other players' actions.
C)assumes that competitors act in an irrational manner.
D)seeks to maximize the players' collective profits.
E)acts in an unpredictable and irrational manner.

Question 11

A Nash equilibrium can be defined as the outcome that:

A)results in equal payoffs to both players.
B)is unique and invariant to the strategy chosen by the other.
C)maximizes the sum of the players' payoffs.
D)results when both players lose by deviating from the equilibrium play.
E)maximizes each player's payoff against the strategy chosen by the other.

Question 12

The following matrix shows the payoffs for Firm 1 and Firm 2 from the strategies R1,R2,and C1,C2 respectively:
Figure 10-2

Refer to Figure 10-2.Identify the correct statement.

A)Firm 1's dominant strategy is R1.
B)The equilibrium strategies are R2 versus C1.
C)Neither player has a dominant strategy.
D)The equilibrium payoffs are 10 and 4.
E)The game is a constant-sum game.

Question 13

The following matrix gives the profits (in thousands of dollars)for Firm 1 and Firm 2 from high-price,medium-price,and low-price pricing strategies:
Table 10-1

Refer to Table 10-1.What is the equilibrium pair of strategies?

A)Low-price for Firm 1 and high-price for Firm 2
B)High-price for both Firm 1 and Firm 2
C)Medium-price for Firm 1 and low-price for Firm 2
D)High-price for Firm 1 and low-price for Firm 2
E)Low-price for both Firm 1 and Firm 2

Question 14

The following matrix gives the profits (in thousands of dollars)for Firm 1 and Firm 2 from high-price,medium-price,and low-price pricing strategies:
Table 10-1

Refer to Table 10-1.Identify the true statement.

A)The players must use mixed strategies since the game does not have a pure-strategy equilibrium.
B)The value of the game is indeterminate.
C)The firm that gets to choose its pricing strategy first will maximize profits irrespective of the other firm's actions.
D)The outcome of the game represents a dominant-strategy equilibrium.
E)The optimal solution to the game can be obtained through backward induction.

Question 15

Game theory offers insight into _____.

A)pricing behavior in competitive markets
B)the optimal output and pricing strategy of a monopolist
C)the degree of monopoly power enjoyed by a firm
D)strategic behavior of firms in an oligopoly
E)adjustment to equilibrium in a monopolistically competitive market

Question 16

The following matrix gives the profits (in thousands of dollars)for Firm 1 and Firm 2 from high-price,medium-price,and low-price pricing strategies:
Table 10-1

What is the difference between a constant-sum game and a zero-sum game?

A)In a constant-sum game,the players' payoffs are in complete conflict with each other unlike a zero-sum game.
B)The equilibrium payoffs in a constant-sum game add up to the same sum,unlike in a zero-sum game.
C)There is no stable equilibrium in a constant-sum game,unlike in a zero-sum game.
D)The actions taken by each player is symmetrical in a constant-sum game,unlike in a zero-sum game.
E)The equilibrium payoff in a constant-sum game is higher than the equilibrium payoff in a zero-sum game.

Question 17

In an infinitely repeated prisoner's dilemma (such as a repeated price war):

A)repeated defection is the only equilibrium.
B)there are two different equilibria: repeated defection and repeated cooperation.
C)repeated cooperation is the only equilibrium.
D)each player cooperates in the early stages,but defects near the end of the game.
E)there is no stable equilibrium strategy for either player.

Question 18

A key difference between a one-shot game and a repeated game is that:

A)the repeated game allows the player to use a mixed strategy.
B)in the repeated game,each player's objective is to get the highest possible payoff with the first move.
C)the repeated game gives the players opportunities for cooperation.
D)in a one-shot game,a player's reputation might be important in influencing the other's action.
E)in a repeated game,players usually take independent actions.

Question 19

The following payoff matrix shows the payoffs for Firm 1 from strategies R1,R2,and R3,in a zero-sum game:
Figure 10-3

Refer to Figure 10-3.The equilibrium of the zero-sum game is:

A)R1 versus C1.
B)R1 versus C2.
C)R2 versus C2.
D)R3 versus C3.
E)R2 versus C3.

Question 20

The following matrix gives the profits (in thousands of dollars)for Firm 1 and Firm 2 from high-price,medium-price,and low-price pricing strategies:
Table 10-1

Refer to Table 10-1.Identify Firm 2's dominant strategy.

A)Firm 2's dominant strategy is the low-price strategy.
B)Firm 2's dominant strategy is the high-price strategy.
C)Firm 2 does not have a dominant strategy.
D)Firm 2's dominant strategy could be high-price or medium-price depending on its bargaining power.
E)Firm 2's dominant strategy is the medium-price strategy.

Question 21

What are the essential elements of a competitive situation (modeled as a game)?

Question 22

When is it optimal for players to adopt mixed strategies? What condition must an optimal mixed strategy satisfy?

Question 23

Why is communication an important factor in competitive situations?

Question 24

The payoff table shows the competition between a new entrant (Firm 1)and an incumbent firm (Firm 2).Determine each firm's equilibrium strategy.

Question 25

Which of the following is true of a sequential game?

A)To obtain a complete solution to a sequential game,there should be perfect information.
B)A sequential game with infinite moves can be solved backward to obtain a complete solution.
C)The equilibrium in a sequential game is always a second-best solution.
D)A sequential game does not have a stable equilibrium.
E)The outcome in a sequential game is inferior to the optimal outcome.

Question 26

Which one of the following is not a feature of the tit-for-tat strategy?

A)A tit-for tat strategy delivers limited punishments for an opponent's defections.
B)A tit-for-tat strategy by both firms supports a cooperative high payoff equilibrium.
C)A defection by an opponent is punished with a perpetual defection to the low-payoff strategy.
D)The tit-for-tat strategy is such that neither firm has an incentive to be the first to defect.
E)The tit-for-tat strategy is a contingent strategy to resolve a prisoner's dilemma.

Question 27

For the payoff table listed,determine the equilibrium outcome.Does either firm have a dominant strategy?

Question 28

List and briefly explain the main entry deterrence policies that an oligopoly firm might employ to prevent other firms from entering a market.

Question 29

What is the role of information in a strategic game?

Question 30

How would finite competition differ from infinite competition between rival firms?

Question 31

How do constant-sum games and non-constant-sum games differ from each other? Give an example of each.

Question 32

Define limit pricing.Under what conditions is it an optimal strategy?

Question 33

Discuss the role of communication in a cooperative agreement.

Question 34

How does strategy formulation differ for zero-sum and non-zero-sum games?

Question 35

Why is backward induction important in competitive strategy?

Question 36

Define the concept of Nash equilibrium.Why is it important?

Question 37

List and explain the various forms of oligopolistic cooperation,which may benefit all firms,and lead to greater profitability.

Question 38

What is meant by a mixed strategy?

A)A mixed strategy refers to two or more pure strategies,each with fixed probabilities.
B)A mixed strategy is a course of action chosen by a player with certainty.
C)A mixed strategy is a player's best response to any strategy that the other player might pick.
D)A mixed strategy refers to the moves made by a player in a repeated game.
E)A mixed strategy refers to the moves made by players in a cooperative game.

Question 39

Discuss the role of reputation in strategic settings.

Question 40

What is the dilemma in the prisoner's dilemma? What is the key assumption about behavior? Suggest one way to overcome the dilemma.

Question 41

Predatory pricing is a practice of deliberately pricing at a loss in order to bankrupt a rival.
(a)Is predatory pricing rational?

Question 42

What is the first mover advantage? Why is it an important strategy? Give an example to illustrate your answer.

Question 43

The payoff table below depicts price competition between two electronics stores.(Payoffs are weekly profits in thousands of dollars for each store. )
(a)Assuming they determine their strategies independently of one another,what are the stores' respective equilibrium strategies? Explain briefly.

Question 44

Construct a payoff table that depicts duopolists,each facing a kinked demand curve.With a kinked demand curve,all firms maintain the current price (at the kink in demand)unless conditions change drastically.

Question 45

Provide an example of a competitive situation where there is a second-mover advantage.

Question 46

Determine all possible equilibrium outcomes in the following non-zero-sum game.

Question 47

Consider the following game: Two players must choose one of three options: rock,paper,or scissors.The winner is determined as follows: Paper slaps rock (and wins);rock crushes scissors (and wins);scissors cuts paper (and wins).If both players choose the same option,it results in a draw.Does the game have a dominant strategy? Does it have an optimal pure strategy?

Question 48

Why does the strategy of tit-for-tat support cooperative equilibrium?

Question 49

Determine each player's equilibrium mixed strategy in the following non-zero-sum game.

Question 50

Determine each player's equilibrium mixed strategy in the following non-zero-sum game.

Question 51

Nintendo and Sony Playstation are each planning to introduce one new game into the market.Each is considering three different kinds of games: an urban action game like Grand Theft Auto,an adventure game like Tomb Raiders,or a strategy game like Sim City.The table shows each firm's profits (Sony's profit first)in millions of dollars:
(a)Assuming the firms act independently,find the equilibrium outcome.Briefly,explain your answer.Is this game an example of the prisoner's dilemma?