Industrial Economics, Industrial Organization How can game theory help Essay

Industrial Economics, Industrial Organization How can game theory help us to understand firm's interactions Discuss the differe - Essay Example A game theory is composed of a series of elements including: players or partners, rules which imply the possible decisions that one is capable of making given another party’s decisions, and the facts that a player could have knowledge of before moving or making a decision. Other elements include the consequences or outcomes of certain moves and the payoffs of each possible outcome. Payoffs imply the money got from a given decision (Durlauf, 2010). Game theories In arriving at the solutions given the game theories, it is important that industries understand certain tools. These tools include dominated and dominant strategies and the Nash equilibrium. A dominant strategy is a tactic that gives higher payoffs no matter what the opponent does, while a dominated strategy is an approach that is lower than another strategy; this implies that for a dominated strategy, there is a dominant strategy that is in existence over it. On the other hand, in Nash equilibrium, no industry or indi vidual is in preference of a different choice. This means that each player chooses the best strategy given the approaches taken by the other players in the market (Durlauf, 2010). In an effort to understanding how firms and industries react, it is vital that the different types of game theories are understood. Firms’ interactions are mainly guided by certain game theories. There is a myriad of game theories. Simultaneous game is one of the game theories. As the name suggests, the players in the market make decisions independent of the other player’s decisions. This means that no party is aware of the other party’s choices or decisions. This kind of scenario forms what is known as a Cournot model. In such a case, each firm or industry tries to make a forecast of what the other player in the market will be so as to arrive at a reasonable decision itself (Durlauf, 2010). In Cournot models, firms predicts the other industry’s output choice and then based on t he forecasts, each firm goes ahead to choosing a profit maximizing output for itself. In cournot, prices as at Nash equilibrium are above the perfect competitive prices. In this case it is clear that the Cournot game model influence the market price as firms try to control their levels of production. Thus, through Cournot model, it is possible for firms to come up with best reaction functions in their production in cases where the industries have completely no clue on what the other players in the market are up to achieving (Mukherjee, 2004). Sequential game is another game theory whereby an industry or firm makes a decision on price or quantity, when it already has knowledge on what another player or partner has decided on. The kind of strategic interaction depicted in such a scenario gives rise to a Stackleberg’s model. In this model, one industry makes a choice before another. It is frequently used to depict industries in which there is a dominant firm. In the Stacklebergà ¢â‚¬â„¢s model, an industry that is a leader chooses output to maximize profits depending on how a follower will react to its choice. Given the choices by a leader, a follower will try as much as possible to make profits given the quantity the leader produces. A leader makes decisions on its own production considering the

Critically discuss the article Essay Example | Topics and Well Written Essays - 250 words

Critically discuss the article - Essay Example Just like in the investment business, the author argues that using past performance of a company’s stock is dangerous. He points out the likelihood of the stock underperforming in the future (Sullivan 2012, p. 1). According to Sullivan (2012, p. 2), investors ask the wrong question by raising an argument of the best funds between active and index funds. To the author, searching for patterns does not result to good investment policy. He proposes that the best way of picking good managers is by mixing art and science. The ability of mutual and hedge fund managers to excellently perform when the indexes are at the peak and then declining as more money comes into the funds makes the practice an art. The science of choosing managers involves a four element criteria of investment process, organizational structure, past returns and due diligence. He points out that performance track record is not the only indicator of good performance by a manager. To him, a good manager ought to have an investment plan or an institutional structure that is better than what people can see. The manager should not only use market timing, but rather understand the market properly to know when to enter and when top exit (Sullivan 2012, p. 3). The author, in trying to advice investors on the best methods to use in hiring managers who can perform has incorporated a number of factors. To him, those who use past performance make a big mistake. A number of factors can lead to managers performing well, which should be verified. However, when hiring, there is no indication that the manager is likely going to maintain the performance record or not. The author was right that a number of factors are involved in evaluating performance by a manager. The fact that the past does not always reflect the future outcome is true. However, past performance cannot be rubbished altogether. The very