APPLIED ECONOMICS FOR MANAGERS SESSION 10 I GAME THEORY AND STRATEGIC INTERACTION A THE SETTING 1 A FEW LARGE PLAYERS a MUST BE LARGE SO THAT ONE PLAYER S ACTIONS HAS IMPLICATIONS FOR ENVIRONMENT FACING OTHERS E G MUST BE LARGE ENOUGH TO AFFECT THE MARKET b MUST BE FEW SO THAT SOURCE OF ACTION CAN BE IDENTIFIED LOOSELY AND STRATEGIC INTERACTION CAN BE CONSCIOUS 2 WITH CONFLICTING GOALS a NON COOPERATIVE b RIVALRY OR CONFLICT B EQUILIBRIUM CONCEPT FOR GAME SITUTATIONS 1 NASH 2 NO PLAYER HAS INCENTIVE TO CHANGE STRATEGIES GIVEN OTHER PLAYER CHOICES C LESSONS FROM GAME THEORY 1 THE RULES MATTER a CHOICE OF STRATEGIC VARIABLE b ORDER OF PLAY c INFORMATION d DURATION OF PLAY 2 BLUFFS AND CREDIBLE THREATS II OLIGOPOLY AND PUBLIC POLICY A COURNOT S INSIGHT 1 NUMBERS MATTER 2 MORE FIRMS MAKE FOR A MORE COMPETITIVE OUTCOME 3 COLLUSION AND CARTELS B BERTRAND S INSIGHT 1 PRICE COMPETITION IS FIERCE AND CAN DUPLICATE COMPETITIVE OUTCOME EVEN IF WITH ONLY 2 FIRMS 2 PRODUCT DIFFERENTIATION AND CAPACITY CONSTRAINTS C STACKELBERG S INSIGHT 1 ORDER OF PLAY IS IMPORTANT 2 SUSTAINED DOMINANCE OF ONE FIRM D SEQUENTIAL GAMES 1 EXTENSIVE FORM TREE DIAGRAMS 2 CREDIBILITY AND SUBGAME PERFECTION E REPEATED GAMES 1 FINITELY REPEATED GAMES EXHAUSTIBLE RESOURCE 2 GAMES OF INDEFINITE DURATION III EXTERNALITIES A ECONOMIC EFFICIENCY PRICE INDICATES TRUE VALUE AND TRUE COST AT THE MARGIN B EXTERNAL EFFECTS 1 COSTS IMPOSED ON PARTY NOT INVOLVED IN THE TRADE PRICE DOES NOT EQUAL TRUE MARGINAL COST 2 BENEFITS EXTEND TO PARTY NOT INVOLVED IN THE TRADE PRICE DOES NOT EQUAL TRUE MARGINAL VALUE 3 A COMMON TRAGEDY