Deck 9: Economics of Strategy: Game Theory

Question 1

A moves first and can go L, M or R. B moves second and can go R, M or L. If both of them end up at L or at R, A gets $ 1 and B get $ 0. If one ends up at L and the other at R then B gets $ 1 and A gets $ 0. If B ends up in M while A does not, then A gets $ -1 while B gets $ 2. If both of them end up in M then both get $ 0. Show that A has no first mover advantage in this game.B. When it is B's turn to move, she will go M regardless of what A does. Since A knows this, the best she can do is to go M. Hence, A gets $ 0 in this game. There is really no advantage in going first.

Answer 1

Since B moves second, we start with B. When it is B's turn to move, she will go M regardless of what A does. Since A knows this, the best she can do is to go M. Hence, A gets $ 0 in this game. There is really no advantage in going first.

Question 2

Sealed bid construction contracts are examples of market games that are:

A) simultaneous and non-repeated.
B) simultaneous and repeated.
C) sequential and non-repeated.
D) sequential and repeated.

Answer 2

A

Question 3

A and B are going to play a game twice. During both repetitions, if they both select a low price or a high price, their market share stays the same. But if one selects a low price while the other selects a high price, then the only with the low gets more money while the one with the high price loses some market share. Based on this information what is the most likely outcome in both periods.

Answer 3

Start with the second period. If you are A, you will select low price because that is the best you can do. Knowing this B will also select a low price. Now you know that B will select a low price in the second period and the game ends there. So in the first period you can do no better than select a low price. Knowing this, B will also select a low price. Hence in both periods both firms will select a low price.

Question 4

What impact does excess capacity play on determining the strategic focus of managers toward competitors?

Question 5

Negotiations and binding contracts are not possible between rivals in:

A) noncooperative games.
B) cooperative games.
C) cartels.
D) single firm monopolies.

Question 6

If two firms exist in the market, it is often expected that the Cournot (Nash) equilibrium will occur. If the firms have significant excess capacity, then it is likely that corporate strategy will emphasize:

A) competition and high prices.
B) competition and low prices.
C) cooperation and low prices.
D) cooperation and high prices.

Question 7

As GMB and VolgaBus compete, GMB selects a new and superior brake technology. VolgaBus prefers a different brake technology, but feels trapped into selecting the same one used by GMB. This is called:

A) adverse selection.
B) first-mover advantage.
C) secure strategy.
D) extension form.

Question 8

The process of looking at the final outcome and then reasoning back to initial decisions is called:

A) sequential decision-making.
B) simultaneous decision making.
C) forward induction.
D) backward induction.

Question 9

As GMB moves to select a new passive restraint safety system for its buses, it finds that its competitor, VolgaBus, opposes the move with an alternative technology. GMB must now evaluate its strategy and determine whether:

A) VolgaBus's alternative is credible.
B) the technology GMB selected is really superior.
C) the secure strategy is the best alternative.
D) VolgaBus should really be the first-mover.

Question 10

In a small numbers environment, _____________ is a useful managerial tool for considering rivals (competitors) responses to decision-making.

A) game theory
B) competitive market theory
C) risk sharing theory
D) intra-firm strategy

Question 11

Wal-Mart built the base of its retailing market power in small cities and towns. In most of those towns, the size of marketplace is so small that only one large retailer can successfully exist. This is known as:

A) adverse selection.
B) first-mover advantage.
C) secure strategy.
D) extension form.

Question 12

A dominant strategy is one where the one firm picks:

A) a strategy only after seeing the other firm's decision.
B) a strategy that must be repeated.
C) a strategy no matter what the rival does.
D) the same the strategy as the rival.

Question 13

What are the key managerial insights derived from game theory? Which one is most important?

Question 14

Game theory between two firms with two outcomes tends to emphasize:

A) noncooperative games.
B) cooperative games.
C) intra-firms decision-making.
D) purely competitive outcomes.

Question 15

Actions like entering a new market, pricing a new product or making a bid to buy another company are all useful Nash-like managerial decisions because they are:

A) repeated often and the outcome depends on the coordination of decisions with rivals.
B) not repeated often and the outcome depends on the coordination of decisions with rivals.
C) repeated often and the outcome depends on the simultaneous decisions of rivals.
D) not repeated often and the outcome depends on the simultaneous decisions of rivals.

Question 16

What is the difference between a repeated and a nonrepeated game and in which form is reputation an important consideration?

Question 17

Risk-averse managers often take the tack of selecting the secure strategy. That is the business decision that provides the:

A) lowest payoff among the best payoffs.
B) highest payoff among the best payoffs.
C) lowest payoff among the worst payoffs.
D) highest payoff among the worst payoffs.

Question 18

The benefit of the mixed strategy is:

A) higher returns for both players in the market.
B) lower returns for both players in the markets.
C) the element of consistency that baffles the rivals.
D) the element of surprise that baffles the rivals.

Question 19

When there are large network effects of adopting a new technology, firms often feel that government regulation or joint ventures can solve the:

A) problem excessive investment.
B) coordination problem.
C) elimination of the new technology.
D) market problem.

Question 20

You toss two coins and if Heads or Tails shows up then I give $ 1. If only one Heads shows up then you give me $ 1. We play this many times. Who comes up ahead at the end of the day?

Question 21

A dominant strategy exists when it is:

A) suboptimal for a firm to choose that strategy regardless of what its rival does.
B) optimal for a firm to choose that strategy regardless of what its rival does.
C) optimal for a firm to choose an other strategy regardless of what its rival does.
D) suboptimal for a firm to choose an other strategy regardless of what its rival does.

Question 22

Which of the following statements is true?

A) Every game has a dominant strategy.
B) Not every game has a dominant strategy.
C) Every game has multiple Nash Equilibria.
D) People always play the Nash equilibria.

Question 23

We have two players A and B, where A moves first and can go L or R, and B moves next and can go T, B or R. A moves again and can go L, R or M. The payoffs are decided after this. The best approach to solve such games is through:

A) dominant strategies.
B) mixed strategies.
C) forward induction.
D) backward induction.

Question 24

Though Nash games are noncooperative, a cooperative outcome is more likely if

A) long run gains are greater than short run gains.
B) firms can easily monitor the outcomes from rival's defection.
C) firms expect the market relationship to last only for a short time.
D) long run gains are smaller than short run gains.

Question 25

Higher discount rates imply:

A) present is more important than the past.
B) present and future are equally unimportant.
C) future is more important than the present.
D) present is more important than the future.

Question 26

Though Nash games are noncooperative, a cooperative outcome is more likely if

A) long run gains are smaller than short run gains.
B) firms can easily monitor the outcomes from rival's defection.
C) firms expect the market relationship to last a long time.
D) firms expect the market relationship to last only for a short time.

Question 27

In the Battle of the Sexes game, Man likes to go to football, while Woman likes to go to the mall. Both of them would rather go together than go alone. They decide to show up to one of these places without contacting each other. A game like this will:

A) a dominant strategy for Man and none for Women.
B) one dominant strategy for both players.
C) no Nash equilibrium strategies.
D) a Nash equilibrium in mixed strategies.

Question 28

We have two players A and B, where A can go L or R, and B can go T, B or R. The payoffs are decided after this. The best description of such games is:

A) dominant strategies.
B) simultaneous moves.
C) sequential moves.
D) backward induction.

Question 29

Though Nash games are noncooperative, a cooperative outcome is more likely if:

A) long run gains are smaller than short run gains.
B) firms can easily monitor the outcomes from rival's defection.
C) firms expect the market relationship to last only for a short time.
D) punishments from defection are credible.

Question 30

Though Nash games are noncooperative, a cooperative outcome is more likely if

A) long run gains are smaller than short run gains.
B) firms can easily monitor the outcomes from cooperation.
C) firms expect the market relationship to last only for a short time.
D) firms can easily monitor the outcomes from rival's defection.

Question 31

Repeated market interaction, particularly when there is no end to the interaction in sight, can:

A) change the dominant strategic equilibrium.
B) not change the dominant strategic equilibrium.
C) only change the equilibrium if the first-mover changes.
D) result in a mixed, secure strategy.

Question 32

A display of a game in a tree-diagram with nodes for every move:

A) is called a second-mover advantage.
B) is called a first-mover advantage.
C) is a simultaneous move game.
D) is an extensive form representation.