In a market with two firms, a firm that has a dominant strategy will do which of the following?

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Chapter 13

Game Theory and Competitive Strategy

 Review Questions

1. What is the difference between a cooperative and a noncooperative game? Give an example

of each.

In a noncooperative game the players do not formally communicate in an effort to coordinate their

actions. They are aware of one another’s existence, and typically know each other’s payoffs, but they

act independently. The primary difference between a cooperative and a noncooperative game is that

binding contracts, i.e., agreements between the players to which both parties must adhere, is possible

in the former, but not in the latter. An example of a cooperative game would be a formal cartel

agreement, such as OPEC, or a joint venture. A noncooperative game example would be a research

and development race to obtain a patent.

2. What is a dominant strategy? Why is an equilibrium stable in dominant strategies?

A dominant strategy is one that is best no matter what action is taken by the other player in the game.

When both players have dominant strategies, the outcome is stable because neither player has an

incentive to change.

3. Explain the meaning of a Nash equilibrium. How does it differ from an equilibrium in

dominant strategies?

A Nash equilibrium is an outcome where both players correctly believe that they are doing the best

they can, given the action of the other player. A game is in equilibrium if neither player has an

incentive to change his or her choice, unless there is a change by the other player. The key feature

that distinguishes a Nash equilibrium from an equilibrium in dominant strategies is the dependence

on the opponent’s behavior. An equilibrium in dominant strategies results if each player has a best

choice, regardless of the other player’s choice. Every dominant strategy equilibrium is a Nash

equilibrium but the reverse does not hold.

4. How does a Nash equilibrium differ from a game’s maximin solution? When is a maximin

solution a more likely outcome than a Nash equilibrium?

A maximin strategy is one in which a player determines the worst outcome that can occur for each of

his or her possible actions. The player then chooses the action that maximizes the minimum gain that

can be earned. If both players use maximin strategies, the result is a maximin solution to the game

rather than a Nash equilibrium. Unlike the Nash equilibrium, the maximin solution does not require

players to react to an opponent’s choice. Using a maximin strategy is conservative and usually is not

profit maximizing, but it can be a good choice if a player thinks his or her opponent may not behave

rationally. The maximin solution is more likely than the Nash solution in cases where there is a

higher probability of irrational (non-optimizing) behavior.

5. What is a “tit-for-tat” strategy? Why is it a rational strategy for the infinitely repeated

prisoners’ dilemma?

What is a dominant strategy a dominant strategy is a strategy that?

What is a dominant strategy quizlet?

Which of the following describes a dominant strategy?

Can there be two dominant strategies?