Game Theory - Edexcel Unit 3

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Harry Bindloss
Game Theory: A special case of rational choice theory or strategic play, where humans are
mostly reasonable but their decisions depend on the behaviour of others. This
interdependence makes the strategies very hard to predict. A method of modelling of
strategic interaction between firms in an oligopoly.
Two prisoners
Can't communicate
Police can convict them both for small crimes
Don't have enough to get them for the big crimes
Both are given a choice:
If they tell they are allowed to be free
Both stay quiet/both tell and get small sentences
Confess Refuse
AL Confess 10 10 0 15
Refuse 15 0 5 5
The most likely outcome is that they will both end up confessing out of distrust as they
cannot talk to each other and work something out so that will assume the worst of the
other. So they both confess, this is called the dominate strategy.
Dominate Strategy: Is a situation in game theory where a player's best strategy is
independent of those chosen by others.
However if they could both talk to each other than they would agree that the best situation
is if they both refused to confess and would both get minimal sentences. This is called the
Nash equilibrium.
Nash Equilibrium: This is a situation occurring within a game when each players chosen
strategy maximises pay-offs given the other payers choice, so that no player has an
incentive to alter behaviour.

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