SUMMARY OF CHAPTER 7:

GAME THEORY: A FRAMEWORK for UNDERSTANDING OLIGOPOLISTIC BEHAVIOUR

Game theory is the study on how interdependent the decision maker makes their choice. The
game must include players, actions, outcomes, equilibria and information. The players are the
decision maker and they can make any possible moves they are deciding. The outcome of the
game is the result the modeler selects from the value of actions, payoffs and other variables
after the game has been completed.
There are few types of information structure for the game. Firstly, perfect information. It is
when each player knows other players move before taking any action. While imperfect
information is when the move taken by other players remain unknown to the other players as
well. Secondly is nature, is the random action taken on players. It can be either passive or
aggressive moves. Thirdly, incomplete information. In games, incomplete information is when
some other players have more information compared to others. In this type of information,
nature is the important players because they always move first and the move is unobserved at
least by one person. While the complete information is either the nature does not make the first
move or the natures moves is observed by all. Next is the certain information where nature
never move even after other player had move. But it is going to be uncertain information if the
nature moves after other player move. Lastly, is symmetric information where all the players
have the same information when each player moves. While asymmetric is when they have
different information compared to other players.
There are also few types of games played in the game theory. Firstly, Simple Zero-Sum Game.
This game practiced with imperfect information and symmetric information. In conclusion, this
game state that if there is increase of one percent on Rival A, there will be the reduction of Rival
B and vice versa. One dominant solution obtained for this game called mini-max strategy which
to maximize he minimum possible outcome for the plays.
Secondly is the Prisoners Dilemma Games. This game consist of imperfect information and
static because both of the players move simultaneously. They can maximize the profit by joining
force. However, if one of them betray any of them, the betrayer will gain more compared to its
opponent. However, if both of them break the agreement, they will earn lower.
Thirdly is the Repeated Games. Most of the oligopoly game is played repeatedly. So, the move
is almost known to the rival. Therefore it is practicing alm ost perfect information. Next is the

Games of Mixed Strategies. In a mixed strategy, each player randomly selects their actions
with given probabilities that maximize its expected payoff given the randomly selected strategy
being played by its opponent. But the most important thing is that once the equilibrium is
obtained, both players are indifferent between playing their equilibrium strategy and any other
strategy.
Lastly is the Sequential Games. Also known as dynamic game, it is presented by game trees.
The game tree represents the game known as extensive form of a game. Because the next
players know the move made by the opponent, this game is practicing the perfect information.

Answer of Problems (Pg239-Pg243)

Question 2
Ben has the choice either to stay out or enter as he is the first mover. Given Bens move, Jerry
can select either to be aggressive if entry or maintain the current price if Ben stay out in order to
maximize the profit. There is no equilibrium occur in this situation because the only choice occur
will make one of them either better off or worse off. Therefore in order to maintain the profit,
Jerry should do whatever it takes to make sure that Ben stay out while maintaining the current
price.

Question 4
The combined profits are vary from cell to cell from the minimum profit of RM6000 to maximum
profit of RM8000. The movie theater both have the same dominant strategy which is offers 2-for1 deal. The Nash equilibrium occur at lower right where both of the theaters practicing 2-for-1deal.
It is the prisoners dilemma game as the prisoner's dilemma is set up in such a way that both

parties choose to protect themselves at the expense of the other participant. As a result
both participants find themselves in a worse state than if they had cooperated with each
other in the decision-making process.

Question 8
The Betsys husband advise is good because there is the 50 percent chance for Betty to get the
$100,000 if she trade. But if she keep the $1000 then she does not have the 50 percent chance.

Question 10
Saudi Arabia

High Price
Low Price

High Price
100,100
140,25

Low Price
25,140
80,80

Venezuela

The combined profits are vary from cell to cell from the minimum profit of RM160 millions to
maximum profit of RM200 millions. Both of the countries have the same dominant strategy
which is offers low price of oil. The Nash equilibrium occur at lower right where both of the
countries practicing low price of oil.
It is the prisoners dilemma game as the prisoner's dilemma is set up in such a way that both
parties choose to protect themselves at the expense of the other participant. As a result both
participants find themselves in a worse state than if they had cooperated with each other in the
decision-making process.

Question 12
a) Pepsi does not have dominant strategy
b) Coke does not have dominant strategy
c) Coke need to develop new product 50 percent of the time and at the same time does not
develop new product 50 percent of the time. while Pepsi need to advertise heavily 50
percent of the time and also lowers price 50 percent of the time.

UA= u (1200) + (1-u) (1200)

UP= u (800) + (1-u) (1600)
UA = UP
u (1200) + (1-u) (1200) = u (800) + (1-u) (1600)

1200=1600800 u

40=800 u
u=1/2

UN= u (1000) + (1-u) (1200)

UX= u (1200) + (1-u) (1000)
UN = UX
u (1000) + (1-u) (1200) = u (1200) + (1-u) (1000)

1200200 u=1000+ 200 u

200=400 u

u=1/2

INDUSTRIAL ECONOMY
ECO 645

Name

: Nur Asyiqin Zaharudin

Class

: BM250 5N

Matric No.

: 2014426538

Lecturers Name : Madam Sabariah Bt. Yusoff

Due

: 17th October 2015