Teoria Jocurilor

Proiect

Student: Furdui Andreea-Evelina

Grupa: 1063
 Articol stiintific
Evadarea din inchisoare
John Nash a ajuns la Universitatea Princeton pentru a incepe lucrarea de licenta cu o
singura recomandare: este un geniu al matematicii. El nu a dezamagit.In varsta de 19 ani si cu
un singur curs absolvit in economie,in primele 14 luni ca si absolvent,el a inceput sa produca
munca care urma sa se termine in 1994,munca ce i-a adus premiul Nobel in economie pentru
contributia la acest joc.
Pe 16 noiembrie 1949 Nash a trimis o notita nu mai lunga de o pagina Academiei de
Stiinte Nationale in care el specifica conceptul ca a devenit cunoscut drept Echilibrul lui
Nash.Acest concept descrie un efect stabil,care rezulta din alegerile rationale ale institutiilor sau
oamenilor bazate pe ceea ce cred ei ca altii vor face.In acest tip de echilibru Nash,nimeni nu este
capabil sa-si imbunatateasca situatia lor personala prin schimbarea strategiei:fiecare persoana
face atat cat poate(el/ea),chiar daca aceasta nu inseamna alegerea optima pentru societate.
Folosindu-se de o matematica imbunatatita,Nash a aratat ca fiecare joc cu un numar
limitat de jucatori,fiecare cu un numar de limitat de optiuni ar avea cel putin o varianta de
echilibru. Cunoasterea acestora au largit asptectele economice. In competitivitatea pietei,unde nu
sunt bariere pentru a intra si produsele tuturor sunt identice,nici un vanzator sau cumparator
individual nu poate influenta piata: niciunul nu trebuie sa aiba o atentie sporita la ceea ce au de
gand sa faca ceilalti.Dar marea majoritate a pietelor nu sunt asa:deciziile rivalilor si a
cumparatorilor conteaza.De la piata de licitatii la piata muncii,echilibrul Nash a adus un
beneficiu asupra deciziilor reale bazate pe informatii despre deciziile fiecarei persoane.
Un exemplu in mod explicit a venit sa arate acest lucru:dilema prizonierilor.Nash a folosit
algebra si numerele pentru a exemplifica aceasta situatie intr-o lucrare publicata in 1951,dar
versiunea comuna pentru studentii de la economie este mult mai captivanta.Cel care l-a sfatuit in
lucrarea sa de dizertatie Albert Tucker,a venit cu ea pentru a sta de vorba cu un grup de psihologi.
Include doi mafioti ce transpira in celule separate,fiecare analizand aceeasi solutie oferita
de avocat.Daca amandoi recunosc crima,amandoi au de ispasit 10 ani in inchisoare,daca unul
dintre ei nu recunoaste in timp ce,celalalt recunoaste,atunci cel care recunoaste va primi o
rasplata,in timp ce,celalalt va trebui sa-si petreaca restul vietii in puscarie.Daca amandoi
tac,atunci amandoi primesc o pedeapsa minora si doar un an de inchisoare.
 Exista doar o solutie a echilibrului Nash pentru dilema prizonierului:amandoi sa
recunoasca.Fiecare este raspunsul cel mai bun pentru strategia celuilalt;din moment ce,celalalt
posibil sa-l fi dat de gol,face posibila evitarea de a petrece tot restul vietii in inchisoare.Tragedia
este ca ar putea sa-si creeze cai de iesire de coordonare,asadar amandurora le-ar fi mai bine pe
cont propriu.
Exemplul arata ca multimea poate fi atat proasta cat si inteleapta.Ce este cel mai bine
pentru fiecare individ,poate fi dezastruos pentru grup.Acest rezultat tragic este mult prea comun
in lumea reala.Lasati liberi sa jefuiasca,indivizii vor fura mai mult decat este necesar pentru
grup,epuizand totul.Competitia dintre angajati pentru a-si impresiona seful prin a sta mai mult
timp in birou va incuraja epuizarea fortei de munca.Bancile au un stimulent de a imprumuta mai
mult,decat sa rezolve problemele cand pretul caselor explodeaza.
Problema multimii
Acest echilibru Nash i-a ajutat pe economisti sa inteleaga cum auto-imbunatatirea
individuala ar putea conduce la multimi necontrolate.Cu toate acestea acest echilibru i-a ajutat sa
rezolve problema: ei doar au fost nevoiti sa se asigure ca fiecare individ a avut cele mai bune
stimulente posibile.Daca lucrurile inca mergeau prost parintii ratau vaccinarea copiilor lor
impotriva pojarului si asta probabil din cauza ca oamenii nu actionau pentru interesul lor.In astfel
de cazuri provocarea publica-politica ar putea fi un tip de informatie.
Ideea lui Nash a avut antecedente. In 1838 August Cournot un economist francez a
inaintat teoria ca pe o piata cu doua companii competitoare,fiecare dintre ele ar constata
dezavantajele urmaririi pietei impartita de stimularea productiei sub forma de preturi mai scazute
si profituri slabe.Involuntar,Cournout s-a inpotmolit intr-un exemplu al echilibrului Nash.Asta a
dat sens fiecarei firme sa-si fixeze nivele de productie bazate pe strategia competitorului
sau;oricum consumatorii ar finaliza cu mai putina marfa si preturi mai mari decat competitia la
sange care s-a infatisat.
Un alt pionier a fost John von Neumann un matematician ungur.In 1928 a luat fiinta anul
Nash,John Von Neumann a formulat prima sa terorie formala a jocurilor,aratand ca in doua
persoane cu suma zero la jocuri ar insemna intotdeauna un echilibru.Cand Nash a impartasit
descoperirea sa cu Von Neumann,pana atunci un demagog intelectual,ultimul a respins rezultatul
catalogandu-l ca banal,vazandu-l pe acesta cu putin mai mult decat o extensie a parerii sale, o
dovada adusa mai dinainte.
De fapt atentia lui Von Neumann focalizata pe ideea de doua persoane si joc cu suma zero
a lasat posibila o cale foarte stramta de aplicatii pentru teoria sa.Multe dintre aceste aplicatii erau
in natura.Una dintre ele a fost ideea de distrugere reciproca in care echilibrul este ajuns prin
armarea adversarilor cu arme nucleare(unii sugereaza ca personajul de film al doctorului
Strangelove era bazat pe Von Neumann. Nici una dintre acestea nu a fost in mod deosebit folosita
pentru gandirea anumitor situatii incluzand marea majoritate a tipurilor de piete in care
victoria unei parti nu implica automat infrangerea celeilalte.
Chiar si asa profesia economica lansata initial de evaluare a lui Neumann si trecuta cu
vederea de descoperirea lui Nash. El s-a lansat in alte cautari matematice, dar promisiunea sa
mare a fost compromisa cand in 1959 a suferit de deziluzie si paranoia, astfel, sotia sa l-a internat
in spital. Dupa eliberarea lui acesta a devenit o figura familiara in campusul Prinston, vorbind
singur si scriind pe tabla. Pe masura ce se lupta cu boala, echilibrul sau a devenit din ce in ce
mai centrat pe disciplina. Paginile dedicate economiei,a ziarelor,citand echilibrul Nash s-au
folosit pana in 1980 si conceptul a fost folosit pentru a rezolva problemele politice reale ale
lumii. Un exemplu faimos a fost sistemul spitalicesc American care in 1940 a fost folosit intr-o
varianta gresita a echilibrului Nash. Fiecare spital dorea sa primeasca studentii cei mai straluciti.
Cu astfel de studenti care in mod special se temeau de razboi, spitalele erau intr-o competitie in a
oferi promisiuni candidatilor din timp. Ceea ce era cel mai bine pentru spital era ingrozitor
pentru colectiv. Spitalele erau nevoite sa angajeze studentii inainte ca ei sa-si fi absolvit
examenele. Acestia urau lucrul asta, deoarece nu aveau sansa sa isi ofere serviciile in mod
competitiv. In ciuda scrisorilor si rezolutiilor de tot felul ale asociatiilor medicale cat si a
studentilor, problema a fost rezolvata corect dupa decade intregi de zbatere, si in final rezolvat in
1990 de Elliott Peranson si Alvin Roth (care mai tarziu au castigat premiul Nobel in economie).
Astazi studentii cedeaza preferintelor lor si sunt distribuiti spitalelor bazat pe un algoritm
care asigura ca nici un student nu poate sa-si schimbe preferintele sale si sa fie trimis la un spital
mai de dorit care de asemenea ar fi incantati sa-i ia si nici nu spital nu poate iesi din sistem si sa
preia un angajat mai bun. Baza acestui sistem Nash este de a se autoperpetua: fiecare face ceea
ce poate cel mai bine bazat pe ce face celalalt. Alte aplicatii politice includ actiunile guvernului
britanic de licenta operationala pentru 3G mobile telekoms in anul 2000. S-a numit teoria
jocurilor pentru a ajuta design-ul actiunii, folosind cateva dintre dedesupturile teoriei Nash si
finalizand o afacere cu carbune in valuare de 22,5 mil lire. Cu toate ca unii dintre investitori au
fost mai putin incantati de investitie. Aspectele acestui echilibru ajuta de asemenea in a explica
de ce adaugarea unui drum la o retea de transport poate face ca, calatoria sa fie mai lunga. Soferii
interesati optand pentru ruta cea mai rapida nu iau in considerare efectele calatoriei mai lungi si
astfel ca pot sa o ia pe scurtatura. Un studiu publicat in 2008 a gasit 7 drumuri care leaga Londra
si 12 in New York, unde inchiderea ar putea incurca fluiditatea traficului. Echilibrul Nash nu si-
ar fi atins punctul culminant fara niste imbunatatiri aduse ideii originale. Prima data in mai multe
situatii este mai mult decat o varianta de echilibru Nash. Soferii aleg pe care parte a drumului sa
conduca,drept cel mai bun raspuns dat celorlalti soferi. Cu multe scenarii finale diferite
depinzand de locul unde ei traiesc; ei conduc pe partea stanga a drumului in Marea Britanie si pe
dreapra in USA. Spre dezamagirea multor economisti din catedra de algebra intelegand ca
strategia are nevoie de cunostinte,de norme si statut social, insa teoria Nash in sine nu a fost
suficienta. A doua rectificare a implicat contabilitatea amenintarilor clare pentru asa zisele
amenintari. Daca un adolescent ameninta sa fuga de acasa, daca mama sa il separa de telefonul
sau mobil, in cazul dat apare echilibrul Nash, cand ea ii da telefonul pentru a aduce pacea mintii
sale. Dar Reinhard Selten, un economist german, care a impartit in 1994 premiul Nobel cu Nash
si John Harsanyi, s-au contrazis ca acesta nu este un scenariu final plauzibil. Mama ar trebui sa
stie ca amenintarea copilului ei este nefondata oricat de tragica ar fi pierderea unui telefon, o
noapte pe strazi ar fi mai crunta. Ea ar trebui sa ii confiste telefonul fortandu-l pe fiul ei sa se
focalizeze pe teme. Munca domnului Selton, i-a ingradit pe economisiti in ceea ce priveste
echilibrul Nash. Harsanyi a formulat ideea ca in multe jocuri reale, oamenii sunt nesiguri in
legatura cu ceea ce doresc partenerii de joc. Economistii s-au luptat sa analizeze strategiile cele
mai bune pentru doua persoane indragostite care incearca sa-si aleaga o locatie acceptabila de
comun acord pentru o intalnire neavand idee ce prefera celalalt. Prin introducerea parerilor
fiecarei persoane in joc ( de exemplu:prin ideea ca celuilalt ii place pizza tot la fel de mult ca si
sushi ) Harsanyi a facut posibila rezolvarea problemei.O problema diferita a continuat sa
apara,puterea predictiva a echilibrului Nash se bazeaza pe comportamentul relational.Cu toate
astea adesea oamenii nu ating acest ideal.In experimentele legate de dilema prizonierului,doar in
jur de jumatate dintre ei ajung sa se confeseze.Pentru economistii care au fost puternic
incorporati in echilibrul Nash cu modelele lor,asta a fost chiar o problema.Care este folosul de a
aseza stimulente bune,daca oamenii nu isi urmeaza cele mai bune interese personale?
Dar nu a fost totul pierdut.Experimentele au aratat de asemenea ca experienta i-a facut pe
jucatori mai intelepti; pana in momentul rundei 10 doar 10% dintre jucatori au refuzat sa
marturiseasca.Asta i-a invatat pe economisti sa fie mai atenti in legatura cu aplicarea acestei
teorii.Cu jocurile complicate sau cu cele de unde ei nu au sansa sa invete din
greseli,perspectivele sale posibil sa nu functioneze.Cu toate acestea echilibrul Nash joaca un loc
central in microeconomia moderna.Nash a murit intr-un accident de masina in anul 2015,pana
atunci starea lui psihica s-a imbunatatit si-a reluat activitatea de predare la Princeton si a primit
premiul Nobel-ca recunoastere ca interactiunile grupului au contribuit mai mult decat orice alt
individ.
Teoria Jocului
Teoria Jocului este cunoscuta la nivel larg ca si avand originile la inceputul secolului XIX
prin publicarea in 1938 a lui Augustin Cournot ,studiile in principiile matematicii a teoriei
imbogatirii,in care el explica reguli de baza ale comportamentului duopol.Oricum apare in
publicatia din 1994 a lui John von Neumann si Oskar Morgenstern in lucrarea teoria jocurilor si
comportamentul economic in care principiile moderne ale teoriei jocului apar formulate. Teoria
jocului a fost larg aplicata comportamentului producatorilor cu cativa sau doar un singur
competitor.

Toate jocurile au urmatorarele cracteristici :

 Reguli: care guverneaza conduita jucatorilor
Plata,cum ar fi: castigul, pierderea sau retragerea
Strategii care influenteaza deciziile in elaborarea procesului
In aplicarea teoriei jocului legat de comportamentul firmelor putem sugera ideea ca
firmele se lovesc de un numar de alegeri strategice care guverneaza abilitatea lor de a achizitiona
plata ceruta incluzand:
Decizii asupra unui pret, cum ar fi:
Cresterea
Scaderea
Pastrarea la un anumit nivel
Decizii de produse cum ar fi:
Pastrarea produselor existente
Dezvolatarea altor produse noi
Decizii de promovare a produselor:
Sa cheltuii mai mult pe reclama
Mai putin ca bani
Sa pastrezi o constanta a valorii cheltuielilor
Firmele ar putea sa capete un nivel de plati posibile din alegerile lor strategice, incluzand:
Mai mult profit pentru actionari
dezvoltare a pietei mai puternica
Sa-si imbunatateasca sansele de supravietuire
Sa scape de competitor

Dilema Prizionerului:
Este un simplu joc ce ilustreaza alegerile care stau in fata oligopolilor. Pe masura ce
citesti scenariul, poti sa interpretezi rolul prizionerilor.

Scenariul :
Robin si Tom sunt prizioneri.
Ei au fost arestati pt o crima avand dovezi clare impotriva lor daca sunt gasiti vinovati vor
primii 2 ani de inchisoare.
De-alungul interviului ofitierul de politie devine suspicios ca cei doi prizonieri sunt de asemenea
vinovati de crima serioasa, dar nu este sigur ca are o dovada clara.
Tom si Robin sunt asezati in camere separate si nu pot comunica unul cu celalalt. Politistul
incearca sa I faca sa marturiseasca crima serioasa dandu-le optiuni cu posibile recompense.
Optiuni:
Fiecaruia i se spune ca daca amandoi recunosc seriozitatea crimei, ei vor primi o sentinta
de 3 ani. Oricum fiecarui prizonier i se spune ca daca marturiseste, dar partenerul nu o face,
atunci el va primi o pedeapsa mai usoara doar de 1 an si partenerul de 10 ani. Ei stiu ca daca
amandoi neaga seriozitatea cu siguranta ei sunt gasiti vinovati de catre ofiteri si vor primi 2 ani.
The pay-off matrix

Ce ai face tu daca ai fi tu unul dintre ei? Da un raspuns inainte ca sa citesti mai departe.
Dilema este ca recompensa fiecaruia este dependenta pe de-antregul de compotamentul celuilalt.
Pentru a evita cel mai rau scenariu ( 10 ani) optiunea cea mai sigura este marturisirea si sa iei
doar 3 ani. Daca coliziunea este posibila ei pot, amandoi, sa nege sa ia 2 ani, dar este o
inselaciune puternica, doarece daca unul neaga si celalalt marturiseste, cel mai bun scenariu este
posibil (1an). Tamndu-ne ca celalalt e posibil sa insele opinia cea mai sigura este sa marturisesti.

Tipuri de strategie:
O strategie maxmax este aceea unde jucatorul adera sa castige beneficul posibil maxim.
Asta inseamna ca ei vor prefera alternativa care include acumularea celui mai bun final posibil,
chiar daca un scenariu nefavorabil este posibil. Aceasta strategie, adesea referindu-se ca fiind cea
mai buna,este adesea vazuta drept naiva si o strategie optimista, in care este acumulata o decizie
favorabila.
Cea mai buna recompensa pt Robin din marturisirea sa este de un an (cu Tom negand-o)
si cea mai buna recompensa din negare cu 2 ani (cu Tom negand-o ) deci cea mai buna dintre
toate este marturisirea (1 an) .
O strategie maxmin este cand jucatorul alege cel mai bun din cel mai rau. Aceasta este o
alegere comuna cand un jucator nu poate sa se bazeze pe partea cealalta pentru a-si pastra
intelegerea care a fost facuta de exemplu:pentru a nega.In dilema prizonierului cea mai gresita
recompensa pentru Robin din marturisire este cea de 3 ani (cand Tom recunoaste) si cea mai
neplacuta este cea de 10 ani (cand Tom se confeseaza.Cu toate acestea, cea mai buna dintre cele
proaste este sa te confesezi.
In acest caz,atat strategiile maxime dar si minime ar fi sa te confesezi,cand asta se
intampla se spune ca este strategia dominanta.
Strategia dominanta
Este cea mai buna strategie in legatura cu ce alege celalalt jucator, in acest caz este
pentru fiecare jucator de a se confesa atat varianta optimista cat si cea pesimista conduce la
aceeasi decizie.
Cum se relationeaza asta la comportamentul unei firme?
In general teoria jocului sugereaza ca firmele intr-un mod improbabil nu au incredere
unele in celelalte,chiar daca ele colaboreaza si ajung la un angajament,cum ar fi cresterea
pretului.
Considera exemplul ipotetic dintre doua linii aeriene care returneaza pretul biletului catre
New York.
Echilibrul lui Nash:
Echilibrul Nash,numit astfel dupa economistul care a castigat premiul Nobel John
Nash,este o solutie pentru un joc in care sunt implicati doi sau mai multi jucatori,care doresc
rezultatul cel mai bun pentru ei si care trebuie sa ia in considerare actiunile celuilalt.Cand acest
echilibru Nash este atins,jucatorii nu pot sa-si imbunatateasca jocul prin schimbarea strategiei pe
cont propriu.Aceasta inseamna ca este cea mai buna strategie ,asumandu-ti ideea ca celalalalt a
ales o strategie si nu o va schimba.De exemplu in legatura cu dilemma prizonierului,marturisirea
este un echilibru Nash,deoarece este cea mai buna varianta,luand in considerare actiunile
celorlalti.
Implicatii:
Teoria jocului furnieaza multe aspecte legate de comportamentul oligopolilor.De
exemplu: indica faptul ca,generand reguli de comportament este posibil sa-ti asumi unele riscuri
de a fi exclus din competitie cum ar fi :
1. Practicarea unei metode de cost simplu,care este folosita de toti participantii,aceasta ar
face ca munca sa functioneze in termin bun, in situatiile unde oligopolii impart costuri
similare,cum ar fi costul petrolului
2. Acordul implicit al unui lider al pretului cu alte firme implicate in exemplu cu linia
aeriana,firma A este posibil sa conduca si sa ridice pretul cu varianta B,ramanand
constanta.In acest caz ambele ar genera castiguri de 120 lire.
3. Supermarket-urile implicit fiind de acord cu taierea preturilor :cum ar fi painea si
fasolea,dar pastrand preturile constant pentru marea majoritate a produselor.
4. In general pastrarea preturilor stabile pentru cresterea preturilor.

Varianta originala (engleza):

Game theory

Prison breakthrough

JOHN NASH arrived at Princeton University in 1948 to start his PhD with a one-sentence
recommendation: He is a mathematical genius. He did not disappoint. Aged 19 and with just
one undergraduate economics course to his name, in his first 14 months as a graduate he
produced the work that would end up, in 1994, winning him a Nobel prize in economics for his
contribution to game theory.

On November 16th 1949, Nash sent a note barely longer than a page to the Proceedings of the
National Academy of Sciences, in which he laid out the concept that has since become known as
the Nash equilibrium. This concept describes a stable outcome that results from people or
institutions making rational choices based on what they think others will do. In a Nash
equilibrium, no one is able to improve their own situation by changing strategy: each person is
doing as well as they possibly can, even if that does not mean the optimal outcome for society.
With a flourish of elegant mathematics, Nash showed that every game with a finite number of
players, each with a finite number of options to choose from, would have at least one such
equilibrium.

His insights expanded the scope of economics. In perfectly competitive markets, where there are
no barriers to entry and everyones products are identical, no individual buyer or seller can
influence the market: none need pay close attention to what the others are up to. But most
markets are not like this: the decisions of rivals and customers matter. From auctions to labour
markets, the Nash equilibrium gave the dismal science a way to make real-world predictions
based on information about each persons incentives.

One example in particular has come to symbolise the equilibrium: the prisoners dilemma. Nash
used algebra and numbers to set out this situation in an expanded paper published in 1951, but
the version familiar to economics students is altogether more gripping. (Nashs thesis adviser,
Albert Tucker, came up with it for a talk he gave to a group of psychologists.)

It involves two mobsters sweating in separate prison cells, each contemplating the same deal
offered by the district attorney. If they both confess to a bloody murder, they each face ten years
in jail. If one stays quiet while the other snitches, then the snitch will get a reward, while the
other will face a lifetime in jail. And if both hold their tongue, then they each face a minor
charge, and only a year in the clink (see diagram).
There is only one Nash-equilibrium solution to the prisoners dilemma: both confess. Each is a
best response to the others strategy; since the other might have spilled the beans, snitching
avoids a lifetime in jail. The tragedy is that if only they could work out some way of co-
ordinating, they could both make themselves better off.

The example illustrates that crowds can be foolish as well as wise; what is best for the individual
can be disastrous for the group. This tragic outcome is all too common in the real world. Left
freely to plunder the sea, individuals will fish more than is best for the group, depleting fish
stocks. Employees competing to impress their boss by staying longest in the office will
encourage workforce exhaustion. Banks have an incentive to lend more rather than sit things out
when house prices shoot up.

Crowd trouble
The Nash equilibrium helped economists to understand how self-improving individuals could
lead to self-harming crowds. Better still, it helped them to tackle the problem: they just had to
make sure that every individual faced the best incentives possible. If things still went wrong
parents failing to vaccinate their children against measles, saythen it must be because people
were not acting in their own self-interest. In such cases, the public-policy challenge would be
one of information.

Nashs idea had antecedents. In 1838 August Cournot, a French economist, theorised that in a
market with only two competing companies, each would see the disadvantages of pursuing
market share by boosting output, in the form of lower prices and thinner profit margins.
Unwittingly, Cournot had stumbled across an example of a Nash equilibrium. It made sense for
each firm to set production levels based on the strategy of its competitor; consumers, however,
would end up with less stuff and higher prices than if full-blooded competition had prevailed.

Another pioneer was John von Neumann, a Hungarian mathematician. In 1928, the year Nash
was born, von Neumann outlined a first formal theory of games, showing that in two-person,
zero-sum games, there would always be an equilibrium. When Nash shared his finding with von
Neumann, by then an intellectual demigod, the latter dismissed the result as trivial, seeing it as
little more than an extension of his own, earlier proof.

In fact, von Neumanns focus on two-person, zero-sum games left only a very narrow set of
applications for his theory. Most of these settings were military in nature. One such was the idea
of mutually assured destruction, in which equilibrium is reached by arming adversaries with
nuclear weapons (some have suggested that the film character of Dr Strangelove was based on
von Neumann). None of this was particularly useful for thinking about situationsincluding
most types of marketin which one partys victory does not automatically imply the others
defeat.

Even so, the economics profession initially shared von Neumanns assessment, and largely
overlooked Nashs discovery. He threw himself into other mathematical pursuits, but his huge
promise was undermined when in 1959 he started suffering from delusions and paranoia. His
wife had him hospitalised; upon his release, he became a familiar figure around the Princeton
campus, talking to himself and scribbling on blackboards. As he struggled with ill health,
however, his equilibrium became more and more central to the discipline. The share of
economics papers citing the Nash equilibrium has risen sevenfold since 1980, and the concept
has been used to solve a host of real-world policy problems.

One famous example was the American hospital system, which in the 1940s was in a bad Nash
equilibrium. Each individual hospital wanted to snag the brightest medical students. With such
students particularly scarce because of the war, hospitals were forced into a race whereby they
sent out offers to promising candidates earlier and earlier. What was best for the individual
hospital was terrible for the collective: hospitals had to hire before students had passed all of
their exams. Students hated it, too, as they had no chance to consider competing offers.

Despite letters and resolutions from all manner of medical associations, as well as the students
themselves, the problem was only properly solved after decades of tweaks, and ultimately a
1990s design by Elliott Peranson and Alvin Roth (who later won a Nobel economics prize of his
own). Today, students submit their preferences and are assigned to hospitals based on an
algorithm that ensures no student can change their stated preferences and be sent to a more
desirable hospital that would also be happy to take them, and no hospital can go outside the
system and nab a better employee. The system harnesses the Nash equilibrium to be self-
reinforcing: everyone is doing the best they can based on what everyone else is doing.

Other policy applications include the British governments auction of 3G mobile-telecoms

operating licences in 2000. It called in game theorists to help design the auction using some of
the insights of the Nash equilibrium, and ended up raising a cool 22.5 billion ($35.4 billion)
though some of the bidders shareholders were less pleased with the outcome. Nashs insights
also help to explain why adding a road to a transport network can make journey times longer on
average. Self-interested drivers opting for the quickest route do not take into account their effect
of lengthening others journey times, and so can gum up a new shortcut. A study published in
2008 found seven road links in London and 12 in New York where closure could boost traffic
flows.

Game on
The Nash equilibrium would not have attained its current status without some refinements on the
original idea. First, in plenty of situations, there is more than one possible Nash equilibrium.
Drivers choose which side of the road to drive on as a best response to the behaviour of other
driverswith very different outcomes, depending on where they live; they stick to the left-hand
side of the road in Britain, but to the right in America. Much to the disappointment of algebra-
toting economists, understanding strategy requires knowledge of social norms and habits. Nashs
theorem alone was not enough.

A second refinement involved accounting properly for non-credible threats. If a teenager

threatens to run away from home if his mother separates him from his mobile phone, then there
is a Nash equilibrium where she gives him the phone to retain peace of mind. But Reinhard
Selten, a German economist who shared the 1994 Nobel prize with Nash and John Harsanyi,
argued that this is not a plausible outcome. The mother should know that her childs threat is
emptyno matter how tragic the loss of a phone would be, a night out on the streets would be
worse. She should just confiscate the phone, forcing her son to focus on his homework.

Mr Seltens work let economists whittle down the number of possible Nash equilibria. Harsanyi
addressed the fact that in many real-life games, people are unsure of what their opponent wants.
Economists would struggle to analyse the best strategies for two lovebirds trying to pick a
mutually acceptable location for a date with no idea of what the other prefers. By embedding
each persons beliefs into the game (for example that they correctly think the other likes pizza
just as much as sushi), Harsanyi made the problem solvable. A different problem continued to
lurk. The predictive power of the Nash equilibrium relies on rational behaviour. Yet humans
often fall short of this ideal. In experiments replicating the set-up of the prisoners dilemma, only
around half of people chose to confess. For the economists who had been busy embedding
rationality (and Nash) into their models, this was problematic. What is the use of setting up good
incentives, if people do not follow their own best interests?

All was not lost. The experiments also showed that experience made players wiser; by the tenth
round only around 10% of players were refusing to confess. That taught economists to be more
cautious about applying Nashs equilibrium. With complicated games, or ones where they do not
have a chance to learn from mistakes, his insights may not work as well.

The Nash equilibrium nonetheless boasts a central role in modern microeconomics. Nash died in
a car crash in 2015; by then his mental health had recovered, he had resumed teaching at
Princeton and he had received that joint Nobelin recognition that the interactions of the group
contributed more than any individual.

LAST IN THIS SERIES:

The Mundell-Fleming trilemma

Game Theory
Game theory is widely regarded as having its origins in the mid-nineteenth century with the
publication in 1838 of AugustinCournot's Researches into the Mathematical Principles of the
Theory of Wealth, in which he attempted explain the underlying rules governing the behaviour of
duopolists. However, it was with the publication in 1944 of John von Neumann and Oskar
Morgenstern's The Theory of Games and Economic Behaviour that the modern principles of
 game theory were formulated. Game theory has been widely applied to the behaviour of
producers with a few or only one competitor.

What is a game?
All games have the following:

1. Rules, which govern conduct of the players

2. Pay-offs, such as win, lose or draw

3. Strategies, which influence the decision making process.

In applying game theory to the behaviour of firms we can suggest that firms face a number of
strategic choices which govern their ability to achieve a desired pay-off, including:

Decisions on price and output, such as whether to:

Raise

Lower

Hold

Decisions on products, such as whether to:

Keep existing products

Develop new ones

Decisions on promoting products, such as whether to:

Spend more on advertising

Spend less

Keep spending constant

Firms could derive a range of possible pay-offs from their strategy choices, including:

More profits for shareholders

Greater market share

Improved chances of survival

 Getting rid of a rival

The Prisoners Dilemma

The Prisoner's Dilemma is a simple game which illustrates the choices facing oligopolies. As you
read the scenarios, you can play the part of one of the prisoners.

The scenario
Robin and Tom are prisoners:

They have been arrested for a petty crime, of which there is good evidence of their guilt if
found guilty they will receive a 2 year sentence.

During the interview the police officer becomes suspicious that the two prisoners are also guilty
of a serious crime, but is not sure he has any evidence.

Robin and Tom are placed in separate rooms and cannot communicate with each other. The
police officer tries to get them to confess to the serious crime by offering them some options,
with possible pay-offs.

The options
Each is told that if they both confess to the serious crime they will receive a sentence of 3 years.
However, each is also told that if he confesses and his partner does not, then he will get a light
sentence of 1 year, and his partner will get 10 years. They know that if they both deny the serious
offence they are certain to be found guilty of the lesser offence, and will get a 2 year sentence.
The pay-off matrix

What would you do if you were one of them? Give an answer before you read on.

The dilemma is that their own 'pay-off' is wholly dependent on the behaviour of the other
prisoner. To avoid the worse-case scenario (10 years), the safest option is to confess and get 3
years. If collusion is possible they can both agree to deny (and get 2 years), but there is a very
strong incentive to cheat because, if one denies and the other confesses, the best outcome of all is
possible - that is 1 year. Fearing that the other may cheat, the safest option is to confess.

Types of strategy
Maximax
A maximax strategy is one where the player attempts to earn the maximum possible benefit
available. This means they will prefer the alternative which includes the chance of achieving the
best possible outcome even if a highly unfavourable outcome is possible.

This strategy, often referred to as the best of the best is often seen as naive and overly optimistic
strategy, in that it assumes a highly favourable environment for decision making.

The best pay-off for Robin from confessing is 1 year (with Tom denying), and the best pay-off
from denying is 2 years (with Tom denying) - so the best of the best is to confess (I year).

Maximin
A maximin strategy is where a player chooses the best of the worst pay-off. This is commonly
chosen when a player cannot rely on the other party to keep any agreement that has been made -
for example, to deny. In the Prisoner's Dilemma, the worst pay-off to Robin from confessing is to
get 3 years (with Tom confessing), and the worst pay-off from denying is 10 years (with Tom
confessing) - therefore the best of the worst is to confess.

In this case, both the maximin and maximax strategies would be to confess. When this occurs, it
is said to be the dominant strategy.

Dominant strategy
A dominant strategy is the best outcome irrespective of what the other player chooses, in this
case it is for each player to confess - both the optimistic maximax and pessimistic maximin lead
to the same decision being taken.

How does this relate to a firm's behaviour?

In general, game theory suggests that firms are unlikely to trust each other, even if they collude
and come to an agreement such as raising price together.

Consider the hypothetical example of two Airlines and return ticket prices to New York.

In this case, for both Airlines, the aggressive maximax strategy is 140m from a low price and
120m from a high price, so a low price gives the maximax pay-off.

In terms of the pessimistic maximin strategy, the worst outcome from a low price is 100m, and
from a high price is 70m - hence alow price provides the best of the worst outcomes.
Again, lowering price is the dominant strategy, and the only way to increase the pay-off would
be to collude and increase price together. Of course, this requires an agreement, and collusion,
and this creates two further risks - one of the airlines reneges on the agreement and 'rats', and the
competition authorities investigate the airlines, and impose a penalty.

Nash equilibrium
Nash equilibrium, named after Nobel winning economist, John Nash, is a solution to a game
involving two or more players who want the best outcome for themselves and must take the
actions of others into account. When Nash equilibrium is reached, players cannot improve their
payoff by independently changing their strategy. This means that it is the best strategy assuming
the other has chosen a strategy and will not change it. For example, in the Prisoner's Dilemma
game, confessing is a Nash equilibrium because it is the best outcome, taking into account the
likely actions of others.

Implications
Game Theory provides many insights into the behaviour of oligopolists. For example, it indicates
that generating rules for behaviour may take some of the risks out of competition, such as:

1. Employing a simple cost-plus pricing method which is shared by all participants. This
would work well in situations where oligopolists share similar or identical costs, such as
with petrol retailing.

2. Implicitly agreeing a 'price leader' with other firms as followers. In the Airline example,
firm A may lead and raise price, with B passively following suit. In this case, both would
generate revenues of 120.

3. Supermarkets implicitly agreeing some lines where price cutting will take place, such as
bread or baked beans, but keeping price constant for most lines.

4. Generally keeping prices stable (sticky) to avoid price retaliation.