In game theory, games are usually classified under two categories: simultaneous games and sequential games. Although simultaneous games make up for a lot of the research made during the early years of game theory, sequential games represent a closer step when modeling economic reality. Consider for instance a firm thinking about entering a new market, dominated by a monopoly. The new firm must take into account that its move (entering or not) will affect the monopolist decisions. Since both actions, the entrance and the monopolist’s reaction, don’t take place at the same moment, they are better represented by a sequential game.
Duopolies are commonly used when explaining sequential games, because they model the interdependence between two firms. We’ll learn in this Learning Path how duopolists react to each other’s actions, how collusions work and how repeated sequential games may change the essence of a game. We’ll learn about:
Sequential games, how they work and how they differ from simultaneous games.
Some basic definitions:
Subgames, which must be understood when dealing with sequential games;
Folk theorem, a necessary tool for the analysis of duopolies and collusion.
Duopolies and collusion:
Cournot duopolies, which we review to see the main differences with
Stackelberg duopolies, a true sequential game;
Collusion agreements would reduce consumer’s surplus while increasing the firm’s.
Repeated games, and how everything changes when considering repetitions.