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Oligopoly Part 3 Dominant Strategy - YouTube
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- So we're going to now
introduce a concept called
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a player's dominant strategy.
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So a dominant strategy is one
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that gives me
the best possible result
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no matter what the other
player does.
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It's my best option no matter
what the other player does.
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And you can go ahead
and look at this matrix
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and try to figure out
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whether either player has
a dominant strategy.
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And it won't always be the case
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that anyone has
a dominant strategy.
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In fact, often it won't.
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Games where everyone has
a dominant strategy are
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often relatively boring.
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So let's look at it here.
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So the way to look
at this is if Target plays low,
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what should K-Mart do?
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So if Target plays low,
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we know that we're
in this column right here.
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And if we're in this column,
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K-Mart has a choice
between playing high
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and getting two and playing low
and getting five.
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So if we're in this column here,
if Target plays low,
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K-Mart should play low.
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What if Target plays high?
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In that case,
K-Mart has a choice
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between playing low
and getting eight
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and playing high
and getting zero.
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So in this case,
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if Target plays high,
K-Mart should play low.
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So, yes, K-Mart does have a
dominant strategy in this game.
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So the dominant strategy
for K-Mart is to play low.
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What about Target?
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Well, if K-Mart plays high,
what will Target want to do?
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Well, if K-Mart plays high,
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then we're in this row
down here,
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and Target will
want to play high
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so that they can get four
instead of three.
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What if K-Mart plays low?
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If K-Mart plays low,
then when Target gets to choose
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which column we're
in in this top row
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and they would want
to choose high.
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So, in fact, in this game,
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Target does not
have a dominant strategy.
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Notice the dominant
strategy is not
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about whether or not you beat
the other player and,
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actually in game theory,
again,
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if we assume that people only
care about their own payoffs.
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So Target wants the highest
possible payoff.
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It doesn't matter that much
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to Target if K-Mart
makes a bunch of money.
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They just care
about how much they make.
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So K-Mart
has a dominant strategy.
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Target actually always
makes more money
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but has no dominant strategy.
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And I wanted to make sure
that I drew that distinction
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between who gets more points
or who gets more profits
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and the idea of
a dominant strategy.
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Now, of course,
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if Target knows that K-Mart has
a dominant strategy,
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Target knows that K-Mart will
play its dominant strategy.
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And if Target knows K-Mart will
play its dominant strategy,
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then we can get a prediction
of what Target will do.
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Namely, Target will
choose to play high.
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So even though Target doesn't
have a dominant strategy,
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the way this game's
going to play out--
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the fact that K-Mart has
a dominant strategy
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is going to make Target's
behavior predictable.
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So you can see
how this whole idea
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of strategic behavior works,
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where you have to try
and get inside the other
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firm's head
and that kind of thing.
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So that's this game.
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And in the next video segment,
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I'll do a little bit
more advanced game.
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