Example -
| | Firm B | ||
| Firm A | | High price | Low price |
| High price | 0.0 | -10,10 | |
| Low price | -100,0 | -20,10 | |
lets revise dominant strategy in this case
- Firm B will gain by only keeping the prices low, no matter the firm A does. So, Low price is the dominant strategy for the firm B
- Firm A doesnot have a dominant strategy. Because if it keeps the prices high, it is not gaining and if it keeps the prices low, it might any of the two.
In the above example, only firm B has a dominant strategy.Firm A doesn’t have a dominant strategy.
Maximin Strategy
- Maximin strategy maximizes the minimum gain that can be achieved.
- One firm doesn’t know what his competitor chooses.
- We know, firm 2 has a dominant strategy( low price)
- Firm A does not a dominant strategy.
- Firm A can either earn 20 or loose 100 by low prices.
- Firm A can earn 0 or loose 10 by keeping the prices high.
- Firm A can choose low prices to earn 20 but if firm B chooses high prices then firm A will loose 100.
- If firm A chooses high prices, it might earn nothing and loose 10
- The worst case scenario – firm A will loose 100.
2nd worst case – firm A will loose 10.
- Firm A can choose high prices(by loosing 10) as it will no longer have a chance of losing 100.
- So, the firm A will chosse high prices because by doing this, it is minimizing the risk that it could have faced with choosing low prices.
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6 comments:
thanx..would be better if it is a bit more in detail..and other subjects like macro and indian economic development notes wpould be grt
you made a mistake on the -20.. it s not -20, it is 20. the firm A can earn 20.. if it was -20, firm A would have a dominant strategy...
ya.. its 20
Hi. The maxmin strategy, for firm A, is the following mixed strategy: 12/13 "High price", 1/13 low price. In this way, your minmax payoff will be -100/13, which is higher than -10, the minmax payoff you would get if you choose the pure strategy High price"
So what is the maxmin equilibrium in that case in the table above
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