What is a dominant strategy?

Is the strategy which provides the player with the highest pay-of in comparison to any other strategy
and regardless for any other strategy played by the other player.

What is a Nash equilibrium?

Set of strategies in which a player is doing the best they can given the actions given from the other
player.

What is the relationship between dominant strategy equilibrium and Nash equilibrium?

Dominate strategy = Nash equilibrium

Test questions

1. Two neighbouring farmers (Jenny and Petra) share a boundary along which there is a small
pond. Both farmers like to fish in the lake, and they can choose to fish with high intensity
(where they would obtain a lot of fish), or low intensity (where they would obtain fewer
fish). If both farmers fish with high intensity, the pond will quickly run out of fish and
become barren. The utility the farmers receive from their possible strategy choices are
described in the table below. Jenny and Petra will make their decisions independently and at
the same time (a simultaneous game).

Fully explain whether either of the farmers has a dominant strategy. Identify the Nash equilibriums
(if any). Explain how the outcome of this game changes when we recognise that it is a repeated
game.

Structure

 Identify the dominant strategy for both players

 Identify Nash equilibrium – if yes, then where?
 Best response
 Repeated game – there needs to be trust, communication and mutual agreement

If Jenny fishes with high intensity Petra should fish with high

If jenny fishes with low Petra should fish low

If Petra fishes high Jenny should fish high

If Petra fishes low Jenny should fish high

 2. Two rival video game manufacturers (Gamma Games and Delta Games) are developing the
next generation of first-person shooter games. These games are likely to be extremely
popular with online gamers, and both games will be released at approximately the same
time. The manufacturers must decide for which platforms they will develop the games and
they have two options – Xbox One or Nintendo Switch. If they select the same platform then
the two games will be competing for the same buyers. The likely profits (in $000s) from
developing on the different platforms are described below. The firms will make their
decisions independently and at the same time (a simultaneous game).

Do either of the manufacturers have a dominant strategy? Identify the Nash equilibriums (if any).
Explain how Delta Games could ensure that they get the payoff of $500,000 even though this is a
simultaneous game

Neither manufactures have a dominate strategy in this game. Nash’s equilibrium occurs when
Gamma Games produces an Xbox one and Delta games produces a Switch. It also occurs when GG
produces a Switch and DG produces an Xbox one.

BESTS RESPONSES

Creditable commitment is shown through actions only. By either investing is one of the options or
only hiring staff to do one of the products
3. Priority Airways (PA), a regional airline is intending to start flying to a new airport that is not
part of its current network, and must decide whether to fly in the morning (when demand is
highest) or in the afternoon. However, Local Airways (LA) already flies to the airport in the
morning. If Priority Airways decides to fly to the airport, Local Airways may have to
reconsider their decision about when to fly, depending on whether Priority Airways chooses
to fly in the morning or the afternoon. The above diagram describes the strategies available
to the two airlines and the associated profits (in thousands of dollars). Identify the Nash
equilibriums in this game, if any. If Local Airways threatened to change their flight time to
match Priority Airways’ choice (morning or afternoon), would this change the outcome of
the game? Why or why not?