NATIONAL INSTITUTE OF TECHNOLOGY, TIRUCHIRAPPALLI

DEPARTMENT OF ELECTRICAL AND ELECTRONICS ENGINEERING

HSIR13 ASSIGNMENT 2

Group member:

Adarsh kumar 107119005

Pradeep kumar 107119089

shashi Kishor 107119117

shravan jha 107119119

Sibtain raza 107119121

Yonous ali 107119141

 PROBLEM STATEMENT: -

Solve five games (either Nash equilibrium or dominant strategy)

as an example of oligopoly firm behaviour.

What Is an Oligopoly:

Oligopoly is defined as a market structure with a small number of firms, none of which can
keep the others from having significant influence. An Oligopoly market situation is also
called ‘competition among the few’.

An oligopoly is an industry which is dominated by a few firms. In this market, there

are a few firms which sell homogeneous or differentiated products. Also, as there are few
sellers in the market, every seller influences the behaviour of the other firms and other firms
influence it. Oligopoly is either perfect or imperfect/differentiated. In India, some examples
of an oligopolistic market are automobiles, cement, steel, aluminium, etc.

Characteristics Of An Oligopoly:

● The firms in an oligopoly are interdependent. This is because every firm’s strategies
affect the market condition for that product.
● Preference is given to group behaviour in an oligopoly. In that way, the interest of all
firms is protected.
● Advertising is of great significance when it comes to an oligopoly. This is because
advertising is an important competitive mechanism that firms have to employ in order
to “stay in the game”.
● In an oligopoly, dominant firms constantly try to outdo their rivals in order to grab a
higher market share.
 ● In an oligopoly, dominant firms constantly try to outdo their rivals in order to grab a
higher market share.
● Firms in an oligopoly practice rigid pricing. This is because lowering the price to win
a greater market share would only lead to competing firms retaliating by charging
even lower prices. This would lead to an unnecessary price war that would benefit
none. Hence, no price competition is witnessed in an oligopoly.

What is Nash equilibrium:

Nash equilibrium is a game theory concept that helps in determining the optimum
solution in a social situation (also referred to as the non-cooperative game), wherein the
participants do not have any incentive in changing their initial strategy. In other words, in this
strategy, a participant does not gain anything by diverging from their initial strategy, which is
subject to the assumption that the other participants also don’t change their strategies.

Nash Equilibrium is a concept originally developed to model simple games.

Effectively, it says this: For any two groups that do not cooperate, there will be a point at
which neither group can benefit from unilateral action, and that the groups will hold their
strategies constant at this point.

What Is Dominant Strategy:

A dominant strategy is one that does not depend on the other player or firm’s
strategy. This strategy is one that is best for the player and not influenced by
the strategy of another player. In this strategy, a player gets a higher payoff
regardless of the action of other players.

Dominant Strategy Outcomes:

In game theory, the following are the outcomes players can expect:

1. Strictly Dominant Outcome:

In some situations, one player enjoys a strict advantage over their opponent. It
means that no matter how good the losing party’s tactic is, the dominant strategy will
always prevail. Here, there is no other possible strategy the opponent can use to alter
their odds.
 2. Weakly Dominant Outcome:

In a weakly dominant outcome, the dominant player dominates the game but
against some strategies, only weakly dominates.

3. Equivalent Outcome:

In an equivalent outcome, none of the actors benefit or lose against each other.
They each choose the one optimal result that is fair for both players. In case one of the
players selects the alternative, it would mean an outlandish gain or loss.

4. Intransitive Outcome:

In an intransitive outcome, none of the above three outcomes are experienced

– no equivalent, strictly, or weak dominant outcome results. The available outcome
happens by chance. Either player can win, while the other loses depending on the
strategy employed. Therefore, in this outcome, there is no well-defined approach to
point to the dominance strategy.

1. Advertising Game:

In this advertising game, two computer software firms (Microsoft and Apple)
decide whether to advertise or not. The outcomes depend on their own selected
strategy and the strategy of the rival firm.

APPLE

ADVERTISE NO ADVERTISE

ADVERTISE (20, 20) (10, 5)

MICROSOFT
NO ADVERTISE (5, 10) (14, 14)
 There are two Nash Equilibria in the Advertising game: (AD, AD) and (NOT, NOT).

Oligopoly Firm Behaviour

As we can see that no company has a dominant strategy over the other, the choice of
advertising or not going to to do that depends on the rival, hence we may see
INTERDEPENDENCE of decision in the market, which is an oligopoly firm behaviour.

2. 5 KNIGHTS Leader Selection Game:

Five knights, A, B, C, D, E, are electing their leader. Each one has a list of
preferences. Examples of preferences, given from highest to lowest, are.

A: A, D, E, C, B

B: B, C, E, A, D

C: C, E, D, B, A

D: D, B, C, E, A

E: E, C, B, A, D

They elect in rounds. In each round, each knight submits one name. A knight is elected if he
gets more votes than all the others. So even two votes may suffice if no other knight gets two
votes. If no one is elected, we proceed to the next round. There are two versions:

Early Case: If the knight’s first choice is elected, this is a payoff of 2 for that knight. If his
second choice is elected, his payoff is 1. If nobody is elected and we proceed to the next
round, the payoff is 0. If his third, fourth, or fifth choice is elected, his payoff is 1, 2, or 3.

Exhausted Case: The knight’s first, second, and third choice gives payoffs of 2, 1, and 0. If
no one is elected and we proceed to the next round, the payoff is 1. If his fourth or fifth
choice is elected, his payoff is -2 or -3.

Each preference pattern defines a new game. Because every player has five options,
there are 5*5*5*5*5 = 3125 outcomes. We could represent them with payoffs on a 5-
dimensional cube.
 Assume A votes for A, B votes for B, C votes for C, D votes for C, and E votes for C.
Then C is elected, and the payoffs for A, B, C, D, E are -2, 1, 2, -1, 1 in the early case game.
Knight A is not happy but still has no reason to vote differently—if he voted for A or D
instead, C would still be elected. But this outcome is not a Nash equilibrium, since D,
knowing the voting pattern of the others, would rather have voted for B to obtain a tie and a
payoff of 0. In the exhausted case game, the payoffs for A, B, C, D, E for the same voting
pattern are -2, 1, 2, 0, 1. Knight D still doesn’t prefer C, but is now just content that
somebody has been elected. That outcome is a Nash equilibrium in this version of the game.

Let's see how we could search for Nash equilibria in the “exhausted knight” version.
The idea is to start with any outcome, defined by a set of choices of the players. If all players
are playing the best response to the other players’ moves, we have a Nash equilibrium.
Otherwise, at least one player does not play a best response yet—we let this player reconsider
and play a best response. Then we evaluate the outcome again. Either we have a Nash
equilibrium now, or we still have a player not playing the best response to the other players’
moves. We continue, until we get a Nash equilibrium.

Oligopoly Firm behaviour

Let A, B, C, D, E be 5 firms controlling the market, so if the strategies of all the other
players are know to someone still it won’t want to change its decision if its in Nash
equilibrium. We can see that if we open the strategies of all to one in this game like an open
market the companies strategies depends on the value chosen by others, which in turn will
show its effect by revision on decisions by the rest and this quest will go on for a long time.
In this game people can also collude to form a bigger entity themselves and bully the others. I
think that this game is a perfect example of Oligopoly.

3. Even-Odd Finger Game:

This is a two-player game. In this game one player (let A) choose odd sum and
other (let B) will choose even. So, if the sum of their outcome no. of fingers is
according to the table

Both players can choose even or odd and the points are as follows: -
 Win lose

A: 1 0

B: 1 0

Player ‘B’

Even Odd

Even (1, 1) (0, 1.5)

Player ‘A’
Odd (1.5, 0) (0.5, 0.5)

Oligopoly firm behaviour

In this game you can see that to win must have the knowledge of what the rival is
doing, for the game to succeed the player must trust each other and SHARE THE
MARKET equally.

4. The Centipede Game

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 their opponent who then takes the
stash, the player receives a smaller amount than if they 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
predefined total number of rounds, which are known to each player in advance.

As an example, consider the following version of the centipede game involving two
players, Shravan and Pradeep. The game starts with a total $2 payoff. Shravan goes
first and has to decide if he should "take" the payoff or "pass." If he takes, then he
gets $2 and Pradeep gets $0, but if he passes, the decision to “take or pass” now must
be made by Pradeep. The payoff is now increased by $2 to $4; if Pradeep takes, he
gets $3 and Shravan gets $1, but if he passes, Shravan gets to decide whether to take
or pass. If she passes, the payoff is increased by $2 to $6; if Shravan takes, he will get
$4, and Pradeep would get $2. If he passes and Pradeep takes, the payoff increases by
$2 to $8, and Shravan would get $3 while Pradeep got $5. The game continues in this
vein for a total of 100 rounds. If both players always choose to pass, they each receive
a payoff of $50 at the end of the game. Note that the money is contributed by a third
party and not by either player.

Oligopoly firm behaviour

Again we may see a market being build up, which just depends on individual for now
but is capable of explaining the oligopoly firm behaviour, we can see the according to
Nash the game should end up in the first round itself but it goes higher increasing the
trust, although it cannot be completely explaining oligopoly but we may see
INTERDEPENDENCE for profit in the market.

5. Marvel vs DC

In this game both the comic book giants are thinking on the idea of releasing a book
on the origin of their beloved characters both having two options , Joker or Alfred for
DC and JARVIS or Mandarin for Marvel. Given the release time of the comics is
same and both of them can have just one comic released the profit table is as follows.

MARVEL

JARVIS MANDARIN

ALFRED (100, 300) (150, 200)

DC
JOKER (500, 250) (600, 150)
We can see that Marvel selecting JARVIS and DC selecting Joker is the case of Nash
Equilibrium.

Oligopoly Firm behaviour

We can see that although the DC comics has a dominant strategy of selecting Joker but the
maximum profit of Marvel is completely DEPENDENT on what DC choose.

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