The central purpose of game theory is to study the strategic relations between supposedly rational players. It thus explores the social structures within which the consequences of a player’s action depend, in a conscious way for the player, on the actions of the other players.

Which of the following circumstances in an industry will result in a Nash equilibrium? a. All firms have a dominant strategy and each firm chooses its dominant strategy.

Assumptions in Game Theory As with any concept in economics, there is the assumption of rationality. There is also an assumption of maximization. It is assumed that players within the game are rational and will strive to maximize their payoffs in the game.

The U.S. debt deadlock between the Democrats and Republicans that springs up from time to time is a classic example of a prisoner’s dilemma. Let’s say the utility or benefit of resolving the U.S. debt issue would be electoral gains for the parties in the next election.

(2) Tit-for-Tat: a strategy in which the player mimics her opponent’s prior-period action in each round; for example, the player cheats when her opponent cheated in the preceding round, and cooperates when her opponent cooperated in the previous round.

tit for tat strategy. a payback strategy that comes into play when 2 people (group) are likely to meet repeatedly.

The Incentive For A Firm To Join A Cartel Is To Be Able To Earn Profits In The Long Run But Not In The Short Run. To Be Able To Earn Larger Profits Than If It Was Not Part Of The Cartel. To Completely Insulate Itself From Competition.

The most common practices employed by cartels in maintaining and enforcing their industry’s monopoly position include the fixing of prices, the allocation of sales quotas or exclusive sales territories and productive activities among members, the guarantee of minimum profit to each member, and agreements on the …

In short, an economic approach seeks explanations for cartel stability in effective internal detection and punishment. Retaliation in the form of price slicing and price wars will serve to increase the costs of cheating, thus ultimately stabilising cartels.

Cartels harm consumers and have pernicious effects on economic efficiency. A successful cartel raises price above the competitive level and reduces output. All of these effects adversely affect efficiency in a market economy.