|Posted on April 16, 2014 at 8:30 PM|
Game theory is an important topic that comes up in the discussion of oligopoly (more specifically for this course, duopoly) behavior. One of your goals is to determine a firm's dominant strategy, or best strategy regardless of the opposing firm's strategy. This will help you find the Nash equilibrium.
When reading a game theory matrix, the firm on the left has its payouts on the left in each cell. The firm on the top typically has its payouts on the right in each cell.
In the diagram below, Totally Inc.'s dominant strategy is Strategy A because $2,305 > $2,272 and $2,350 > $2,325.
Awesome LLC.'s dominant strategy is also Strategy A because $2,305 > $2,272 and $2,350 > $2,325.
Therefore, the Nash equilibrium is the cell where both firms play Strategy A. We know that each firm will earn $2,305 when they play their dominant strategies. As long as one firm has a dominant strategy, you can find the Nash equilibrium.
AP Microeconomics Unit 2 Product Markets