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Games, Information and

Strategy

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Most vexing and persistent
problems of Business man is:
Outguessing the rival

Experience with the behavior of a competitor


makes it relatively easy to predict his strategies.

If this information is available, it is in effect,


possible to choose that decision which
maximizes the farms expected return after the
effects of the rivals counter moves are taken into
consideration.
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.Outguessing the rival
It is often against the competitors interests to
permit this short of a calculation.

Management may therefore avoid too obvious a


pattern in its decision making in order to keep
the opposition guessing.

When it succeed in this goal, no such simple


prediction of competitive behavior will be
possible.

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.Outguessing the rival
In this context it is possible to approach the
analysis of competitive behavior by a more
deductive route.

Instead of asking, inductively, what we can infer


from competitors past behavior, one seek to
determine a rivals most profitable strategy to
ones own best moves and to formulate the
appropriate defensive measure.

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This is the approach which
Game Theory
has adopted

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Game Theory
Three Nobel Memorial Prize in Economics-1994

1. Reinhard Selten (born 5 October 1930) is a German economist


2. John Charles Harsanyi (born May 29, 1920 in Budapest, Hungary)
3. John Forbes Nash, Jr. (born June 13, 1928) is an American economist

An award winning Movie

A Beautiful Mind
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Game Theory
The study of rational behavior among interdependent
agents

Agents have a common interest to make the pie


as large as possible, but

Agents have competing interests to maximize


their own share of the pie.

An agents rational decisions require anticipating


rivals responses

These expectations are not perfect, so


uncertainty is a necessary feature of games
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Game theory and Some Related
Concepts
Economic situations are treated as
games.
A game is the collection of rules,
regulations and conventions known to
planners and observed by the players.

It is a situation in which two or more


participants, the players, confront one another
in pursuit of certain conflicting objectives.
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.Game theory and Some Related
Concepts
The rules of the game state who can do
what, and when they can do it.
A player's strategy is a plan for actions in
each possible situation in the game.

A player's payoff is the amount that the


player wins or loses in a particular
situation in a game.
A payoff matrix shows all possible
outcomes in a game. 10
Classification of Games
Number of Players:
Two-person games.,n-person games

Number of strategies
Finite or infinite
Payoff situation
Constant sum or non constant sum
Pre-play negotiation:
Cooperative or non-cooperative
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If you have a Dominating strategy,
use it

A dominant strategy is one that is best for


a given player irrespective of the choice
exercised by other player.

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Example of Dominant Strategy

Use
strategy 1

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Look for any equilibrium

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Maximin and Minimax Strategies
Bs Strategy

1 2 3
As 4

S 50 90 18 20 18
1
T
R
A
27 5 9 95
2 5
T
E 64 30 12 20
G 3 12
y
64 90 18 95
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Prisoners Dilemma

Confess Not confess

Confess (2,2) (0,10)

Not confess (10,0) (0,0)

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Prisoners Dilemma

One peculiarity of the nonzero-sum,


noncooperative case is that both players
will often be led by self-interest to take
decisions which are mutually
disadvantages.

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..Prisoners Dilemma

Equilibrium need not be efficient.

Noncooperative equilibrium in the


Prisoners dilemma results in a solution
that is not the best possible outcome for
the parties.

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Prisoners Dilemma

In the absence of complete


information Individual
rationality leads to group
sub-optimality.

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Information and Strategy

Asymmetric Information

Adverse Selection

Moral Hazard

No Show Problem

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Asymmetric Information

When one party to a transaction has


better information than others, we
encounter a case of asymmetric
information.

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..Asymmetric Information
(Used Car Market)
In consumer goods Markets the seller
frequently knows more about the product
than does the buyer.
For example, an individual seller who has
owned a vehicle for a sustained period of
time, know much more about the car than
does any potential buyer.
Specially if the car is bad the seller will
know but the buyer will not know.
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..Asymmetric Information
(Used Car Market)
It is frequently argued that the result of this
asymmetry will be a used car market consisting
primarily of cars that are bad.
As buyer will not be able to distinguish a bad
from a good used car and therefore will not want
to pay the price that a seller offering a good car
is willing to accept.
Therefore, buyers will offer a price somewhere
in between what a good car is worth and what a
bad car is worth.

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Adverse Selection
When the information characteristics of a
transaction are such that undesirable
products, services or customers are
attracted to it.

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Moral Hazard
It is an incentives for a party to a
transaction to engage in risky or
undesirable behavior (to the detriment of
other party) because the transaction
protects the first party against loss.

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Asymmetric Information and No-
Show Problem

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Thank You

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