how to create your own game theory model

She separates the two prisoners and then offers each the following deal: “If you confess and your partner doesn’t, you will get the minimum sentence of one year in jail on the possession and burglary charges. The DA decides on a strategy designed to elicit confessions. The DA now has a sure conviction on a possession of cocaine charge, but she will get a conviction on the burglary charge only if at least one of the prisoners confesses and implicates the other. On being searched, each is discovered to have a small amount of cocaine. Suppose a local district attorney (DA) is certain that two individuals, Frankie and Johnny, have committed a burglary, but she has no evidence that would be admissible in court. The second deals with strategic choices by two firms in a duopoly. The first examines a classic game theory problem called the prisoners’ dilemma. We shall use two applications to examine the basic concepts of game theory. They changed their strategic choices when other airlines chose to slash their fares, and all firms ended up with a payoff of lower profits-many went into bankruptcy. Some firms in the airline industry, for example, raised their fares in 2005, expecting to enjoy increased profits as a result. The firm’s payoff depends partly on the strategic choice it makes and partly on the strategic choices of its rivals. In general, the payoff in an oligopoly game is the change in economic profit to each firm. The outcome of a strategic decision is called a payoff. Once a firm implements a strategic decision, there will be an outcome. IBM boosted its share in the highly competitive personal computer market in large part because a strategic product-development strategy accelerated the firm’s introduction of new products.

The other airlines’ decision to match or ignore their rival’s price decision is also a strategic choice. An airline’s decision to raise or lower its fares-or to leave them unchanged-is a strategic choice. Game theory is an analytical approach through which strategic choices can be assessed.Īmong the strategic choices available to an oligopoly firm are pricing choices, marketing strategies, and product-development efforts.

A choice based on the recognition that the actions of others will affect the outcome of the choice and that takes these possible actions into account is called a strategic choice. The Start Up feature at the beginning of this module suggested the uncertainty eBay faces as it considers the possibility of competition from Google. Oligopoly presents a problem in which decision makers must select strategies by taking into account the responses of their rivals, which they cannot know for sure in advance.

How to create your own game theory model