Chapter 13: Monopolistic Competition: Competitors, Competitors Everywhere

Chapter 12: Game Theory: Fun Only if You Win

Actions

Actions are the choices a player can make. In Monopoly, it may be the decision to buy or not to buy Boardwalk when you land on it. Players need to consider possible actions when making a decision — not only their own but also the possible actions of their rivals. If you don’t buy Boardwalk, who might?

The actions chosen by all players ultimately determine the game’s outcome. Thus, before starting the game, you need to recognize who all the players are, and the possible decisions they can make. Sound decisions require that you completely specify the actions you can take and what rivals do given each of your possible actions. Therefore, the game’s structure must recognize how players respond to all possible circumstances at each stage in the game.

205

Determining the payoff

Payoffs represent the outcome or returns of the game. The payoff depends not only on the decisions you make, but also on the decisions your rivals make. Thus, payoffs are the result of a combination of actions indicating the players’ strategic interdependence.

A payoff table summarizes the various combinations of outcomes for all players and all possible actions. Typically, players are assumed to be rational when they make decisions. Players subscribe to the philosophy “Don’t harm thyself.” This philosophy is a sound assumption to make in the profit-motivated business world.

Identifying whose turn it is in decision-making

The game theory framework requires knowing how players take turns while playing the game. In tic-tac-toe, the player who moves first has a much higher probability of winning because that player gets to move five times in the game while the player moving second gets only four possible moves. Similarly, in chess, numerous studies have shown that white, the color that always moves first, wins more than fifty percent of the games.

Similarly, how firms take turns in oligopoly influences the outcome. In Chapter 11’s presentation of the Stackelberg model, the firm that is the leader and chooses first produces a lot more output than the firm that chooses second. Or if Coca-Cola comes out with a new advertising campaign, it might be able to steal customers from Pepsi. Similarly, the airline that cuts fares can increase the number of passengers it carries until rivals have an opportunity to respond.