Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 12] GAME THEORY AND OLIGOPOLISTIC BEHAVIOR 275
Nash equilibrium The situation when each player has chosen his or her optimal strategy, given the strategy chosen by
the other player.
Nonzero-sum game A game where the gains of one a player does not come at the expense of or are not equal to the
losses of the other.
Payoff The outcome or consequence of each combination of strategies by the players in game theory.
Payoff matrix The table of all the outcomes of the players’ strategies.
Players The decision-makers in the theory of games (here the oligopolistic firms or its managers) whose behavior we are
trying to explain and predict.
Prisoners’ dilemma The situation where each player adopts his or her dominant strategy but could do better by
cooperating.
Repeated games Prisoners’ dilemma games of more than one move.
Strategic move A player’s strategy of constraining his or her own behavior to make a threat credible so as to gain a
competitive advantage.
Strategies The potential choices that can be made by the players (firms) in the theory of games.
Tit-for-tat The best strategy in repeated prisoners’ dilemma games which postulates “do to your opponent what he or she
has just done to you”.
Zero-sum game A game where the gains of one player equals the losses of the other (so that total gains plus total losses
sum to zero).
Review Questions
1. Game theory (a) examines the choice of optimal strategies in conflict situations, (b) seeks to predict the behavior of
players, (c) can be used to analyze oligopolistic interdependence, (d) all of the above.
Ans. (d ) See Section 12.1.
2. A dominant strategy refers to the strategy that a player in a game chooses (a) independently of the strategy of the
other player, (b) given the strategy of the other player, (c) in Nash equilibrium, (d ) in a cartel.
Ans. (a) See Section 12.2.
3. Which of the following statements is correct? (a) a dominant strategy equilibrium is always a Nash equilibrium,
(b) a dominant strategy equilibrium can be a Nash equilibrium, (c) a Nash equilibrium is also a dominant strategy
equilibrium, (d ) a Nash equilibrium cannot be a dominant strategy equilibrium.
Ans. (a) See Sections 12.2 and 12.3.
4. All games always have (a) a single dominant strategy, (b) multiple dominant strategies, (c) a single Nash equilibrium,
(d ) none of the above.
Ans. (d ) See Sections 12.2 and 12.3.
5. In a prisoners’ dilemma (a) each player has a dominant strategy, (b) the players are not in Nash equilibrium, (c) the
players cannot do better by cooperating, (d ) none of the above.
Ans. (a) See Section 12.4.
6. The prisoners’ dilemma can be used to analyze (a) price competition, (b) advertising expenditures by rival firms,
(c) product style changes, and (d ) all of the above.
Ans. (d ) See Section 12.5.