Done by: Sara Khaled

ID: 201700836
Subject: Advanced Economic Theory
 One of the major
developments in 20th
century

 Originally developed by
John von Neuman and
Oskar Morgenstern in
1944.

 It’s a branch of
mathematics used to
analyze the strategic
behavior of decision
makers

 Had been studied by

mathematicians, politicians,
political science, and
philosophers
 Helps in analyzing oligopoly firm behavior

 Help companies make high risk/high reward

strategic decisions in highly competitive
markets and situations.

 Helps Improving Strategic Decision Making

 It is a strategy that achieves better results for
a player, no matter what the other player do.

 Not all players in games have dominant

strategies
 What is Player 1’s Dominant Strategy?

Player 2

Run Stop

Run (1,1) (-1,-3)

Player 1
Stop (2,-1) (2,3)
 Considered one of the most important concepts
in Game Theory

 It is when no player has anything to gain by

changing only his own strategy

 Each player is making the best decision possible

given the decision of the other players

 NB: Not all games have Nash equilibrium

 NB: Some Games may have more than one equilibrium
 Pure Strategy Mixed Strategy

Players only play a Players make a

single strategy in combination of
equilibrium several strategies
with a fixed
Ex: Rock Paper probability
Scissors
 Limit Pricing

 Predatory Pricing

 Capacity Expansion
 Limit pricing occurs when firm reduces its
price in order to deter new entrants from
joining the market

 As they lower their price, they may increase

their output which deepens their market
saturation , making it difficult for new firms
to enter
 This increased presence in the market along
with lowering prices is considered an
effective barrier to entry to new firms

 According to Bain:
Firms do not maximize their profits in the
short run due to fear of new firms entry
attracted by maximum profits
A firm sets a low price to drive rivals out of the
market

 Rivals have already entered

 Are games played over and over again

 Such a strategy depends on whether the

game is played a fixed number of times or
infinite number of times
 It is a game where the players do not have a
common knowledge of the game being
played

 Known as Bayesian Games

 For example, in price competition, firms

might know their own costs, but not the costs
of the rival
 It is a helpful way of thinking

 Has become an essential analytical tool in

economics, sociology, political science and
even biology

 To be literate in the modern age, you should have a

general understanding of Game Theory