Consider the example of two criminals arrested for a crime. Prosecutors have no hard evidence to convict them. However, to gain a confession, officials remove the prisoners from their solitary cells and question each one of them in separate chambers.
Neither prisoner has the means to communicate with each other. Officials present four deals, often displayed as a 2 x 2 box. If Prisoner 1 confesses, but Prisoner 2 does not, Prisoner 1 will get three years and Prisoner 2 will get nine years.
If Prisoner 2 confesses, but Prisoner 1 does not, Prisoner 1 will get 10 years, and Prisoner 2 will get two years. The most favourable strategy is then not to confess. For example, if provoked, a player subsequently responds with retaliation; if unprovoked, the player does cooperate. The inevitable changes ahead for our industries and for our way of life are just as profound as they were in previous shifts in eras.
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The catch here is if the second player rejects the amount offered, both A and B get nothing. The dictator and ultimatum games hold important lessons for issues pertaining to causes such as charitable giving and philanthropy. The worst possible outcome is realized if nobody volunteers. For example, consider a company in which accounting fraud is rampant, though top management is unaware of it.
Some junior employees in the accounting department are aware of the fraud but hesitate to tell top management because it would result in the employees involved in the fraud being fired and most likely to be prosecuted! Being labelled as a whistleblower may also have some repercussions and consequences down the line.
The centipede game is an extensive-form game in game theory in which two players alternately get a chance to take the larger share of a slowly increasing money stash. It is arranged so that if a player passes the stash to his opponent who then takes the stash, the player receives a smaller amount compared to if he had taken the pot. The centipede game concludes as soon as a player takes the stash, with that player getting the larger portion and the other player getting the smaller portion!
The game has a pre-defined total number of rounds, which are known to each player well in advance. The biggest issue with game theory is that, like most other economic models, it relies on the assumption that people are rational actors that are self-interested and utility-maximizing.
We are social beings who do cooperate and care about the welfare of others, often at our own expense! Game theory cannot account for that fact that in some situations we may fall into Nash equilibrium, and other times we may not, depending on the social context and who the players are.
The players were given a payoff matrix; each could make one choice, and the game ended after the first round of choices. The real world of oligopoly has as many players as there are firms in the core industry.
They play round after round: a firm raises its price; another firm introduces a new product, when the first firm cuts its price, then a third firm introduces a new marketing strategy, and so on. An oligopoly game is a bit like a baseball game with an unlimited number of innings one firm may come out ahead after one round, then another will emerge on top another day! For example: In the computer industry game, the introduction of personal computers changed the rules. IBM, which had won the mainframe game quite handily, struggles to keep up in a world in which rivals continue to slash prices and improve quality.
Oligopoly games may have more than two players, so the games are far more complex, but this does not change their basic structure.
The fact that the very games are repeated introduces new strategic considerations. A player must consider not the ways in which its choices will affect its rivals, but how its choices will affect them in the future as well!
Let us keep the game simple now, and consider a duopoly game. The two firms have colluded, either tacitly or overtly, to create a monopoly solution. As long as each player upholds the very agreement, the two firms will earn the maximum economic profit possible in the very enterprise. Instructor bio Prof. Jagannatham IIT Kanpur. From April '07 to May'09 he was employed as a senior wireless systems engineer at Qualcomm Inc. He has contributed to the He has been twice awarded the P.
A book authored by him titled Principles of Modern Wireless Communications Systems has been published by McGraw Hill Education and comprehensively covers several key aspects of modern wireless technologies. Vimal Kumar. After receiving a Ph. In June , he joined Indian Institute of technology Kanpur. Initially, he worked as an Assistant Professor of Economics and was promoted to Associate Professor in In the game theory, different players adopt different types of strategies on the basis of the outcome, which is obtained by adopting the strategy.
Therefore on the basis of outcome, the strategies of the game theory are classified as pure and mixed strategies, dominant and dominated strategies, minimax strategy, and maximin strategy. Let us discuss these strategies in detail. In a pure strategy, players adopt a strategy that provides the best payoffs.
In other words, a pure strategy is the one that provides maximum profit or the best outcome to players. Therefore, it is regarded as the best strategy for every player of the game. This is because if both of them increase the prices of their products, they would earn maximum profits.
However, if only one of the organization increases the prices of its products, then it would incur losses. On the other hand, in a mixed strategy, players adopt different strategies to get the possible outcome. For example, in cricket a bowler cannot throw the same type of ball every time because it makes the batsman aware about the type of ball.
In such a case, the batsman may make more runs. However, if the bowler throws the ball differently every time, then it may make the batsman puzzled about the type of ball, he would be getting the next time. Therefore, strategies adopted by the bowler and the batsman would be mixed strategies, which are shown ion Table In case, the bowler or the batsman uses a pure strategy, then any one of them may suffer a loss. Therefore, it is preferred that bowler or batsman should adopt a mixed strategy in this case.
For example, the bowler throws a spin ball and fastball with a combination and the batsman predicts the combination of the spin and fast ball. However, it may be possible that when the bowler is throwing a combination of spin ball and fastball, the batsman may not be able to predict the right type of ball every time.
Similarly, if the bowler throws the ball with a combination of fast and spin ball respectively, and the batsman would expect either a fastball or a spin ball randomly. This shows that the outcome does not depends on the combination of fastball and spin ball, but it depends on the prediction of the batsman that he can get any type of ball from the bowler. A dominant strategy is the one that is best for an organization player and is not influenced by the strategies of other organizations players.
Let us understand the dominant strategy with the help of the example given in Table This would results as the best strategy of XYZ. When XYZ increases its prices, it would earn Rs. Therefore, it is better for XYZ to make its price constant so that it can earn more. The dominant strategy- for XYZ is to keep the prices of its products constant. On the other hand, the dominant strategy- of ABC would also be to keep the price constant.
This is because ABC would incur losses if it increases the prices of its products. While analyzing games, the player who has adopted the dominant strategy is identified and then the strategies of other players in the game are judged on the basis of the dominant strategy. However, the existence of the dominant strategy in every game is not possible.
On the other hand, a dominated strategy is the one that provides players the least payoff as compared to other strategies in a game. In the analysis of the game theory, dominated strategies are identified so that they can be eliminated from the game. Let us understand the dominated strategy with the help of an example. Now, assume that there are only two plays left and the ball is with the offense team.
In this case, the offense team would adopt two strategies; one is to run and another is to pass. On the other hand, the defense team would have three strategies; one is to defend against running, defend against pass through line-backers and defend against pass through quarterback blitz. In Table-4, the numerical value represents the goals made by the offense team.
In this case, neither offense nor defense team have a dominant strategy. However, the defense team does have one dominated strategy that is quarterback blitz. Either in case of defending run or pass, quarterback blitz strategy would yield more goals to the offense team.
