Oligopoly Games: This first section presents a series of games that use the models from the previous chapter as inspiration.  Each of the games is an example of a social dilemma, a game in which players each following their own best interest leads to a suboptimal outcome.  Chances are that if students have been exposed to any game theory in the past it has been a quick mention of a game of this type, likely the famous Prisoners’ Dilemma or something similar.

 

There are two very important issues to emphasize at the outset.  First is the idea that payoffs represent everything that the players care about, and we assume that they seek to maximize their payoff in absolute, as opposed to relative, terms.  Students are often focused on the idea of ‘winning’ the game by getting a higher payoff than their opponent.  There is nothing wrong with considering relative payoffs, but it is important for everyone to be on the same page and the convention in game theory is to view payoffs from an absolute perspective, at least for now.  The second thing to be very careful about when introducing students to games is to make sure they understand that a row player picks rows and a column player picks columns.  The figures in the text are helpful in this regard with differences in shading and location of the payoff numbers.  It is wise to do a few more simple examples early on than one might think necessary.

 

The two important operational considerations in this section are dominant strategies and best responses.  It is typically helpful to students to point out that identifying a best response is really just answering a series of ‘what if’ questions.  What if my opponent picks the top row?  What would be the best thing for me to do?  It is then obvious to most students that a dominant strategy exists when a player answers these ‘what if’ questions the same way in all scenarios.