ECON 1051 1nd Edition Lecture 36 Outline of Last Lecture I. Game Theory a. Definitionb. Three Key Characteristics c. Business Strategy d. The Game Outline of Current Lecture I. Outcome to Apple/Samsung GameII. Game Theory ExampleCurrent LectureContinued From Last Lecture:Choose $700 (Apple) Choose $600 (Apple)Choose $700 (Samsung) A: $10 million profitS: $10 million profit A: $20 millionS: $5 millionChoose $600 (Samsung) A: $5 millionS: $20 millionA: $8 millionS: $8 million i. Rule:1. CEOs have to make decisions at the same time a. Don’t know what the other company is going to do before they make their decision2. Apple’s strategy is dominant strategy (to pick the low price): a. If Samsung picks a high price, Apple would want to pick a low price b. If Samsung goes with the low price, Apple would want to try and match the price I. Outcome to the Apple/Samsung Game:a. Ends up with a profit of $8 million each These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. Both charge the low price of $600 (dominant strategy)b. $700 would make more profit but it’s not strategic c. Prisoner’s Dilemma i. Making decisions without knowing what the other person is doing ii. Nash Equilibrium 1. The outcome of the game2. Collection of dominant strategies 3. Don’t want to deviate with what the other person is doing iii. Tension between cooperative outcome and non-cooperative 1. Collusion = $700/$700 a. Can’t legally force the agreement II. Game Theory Examplea. Pepsi v. Coke Start a Campaign (Pepsi) Don’t Start a Campaign (Pepsi)Start a Campaign (Coke) P: 1 millionC: 1 millionP: -2 millionC: 20 million Don’t Start a Campaign (Coke)P: 30 millionC: -5 millionP: 5 millionC: 5 million a. Dominant Strategy for Pepsi:i. Start a campaign b. Non-cooperative outcome:i. Both start campaigns ii. Nash equilibrium c. Cooperative Outcome: i. Don’t start
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