4.20 Dominant Strategy AP Micro

are you guys welcome back in this video we're gonna be looking at dominant strategies and how to determine whether one firm or the other has or one player the other has a dominant strategy alright so let's start by defining non dominant strategy a player has a dominant strategy win they have a single course of action is what is best for them regardless of what the other player does in this context that means that if coke for instance were to have a dominant strategy that would mean that they do the same thing either advertiser don't advertise regardless of what Pepsi does if that thing is still their choice so without looking at the numbers designing remember it's on there but for instance that would mean that if coca Adama strategy they should always advertise regardless of whether Pepsi advertisers are doesn't advertise it it won't matter because Adam measured you means AB at play or that choice is the best thing for them to do regardless of what the other company or other players doing so let's go ahead and look at this and see if we can find in dominant strategy all right so we have Pepsi and I'll go ahead and do this again just like on the introductory video just to make sure that we're good with which is which I'm here to we're more comfortable Pepsi since they're the horizontal axis here they are going to be represented by the first number so these are Pepsi's options they can either earn $25 so that's a little P $60 zero dollars or $50 alright coke the vertical they have that second number from left to right is coke so of a little C next to all four of their options all right you can feel free to do this if it helps you but eventually like this should just come second nature hopefully so what we need to do is we're going to go through these let's sprint start with Pepsi alright we want to know if Pepsi has a dominant strategy what that means is we want to know what should Pepsi do depending on what Coke does if Coke advertises what's better production to do then we want to know if Coke doesn't advertise what's it better for Pepsi to do and if those two things are the same if both answers are the same that means that Pepsi has a dominant strategy if they are not the same then they don't have a dominant strategy it is as simple as that so let's get right into it so Pepsi can advertise or not advertise Coke has the same two options advertise or don't advertise so what we're going to be looking at here is let's start with Coke advertising we want to know what should Pepsi do if Coke advertises alright so we have our two payoffs for Pepsi are the numbers on the Left Pepsi can either earn so if Coke advertises perhaps you'll earn $25 if they also advertise or they will earn zero dollars if they don't advertise all we need to do is compare which number is greater so this is actually really really simple $25 is greater than zero dollars so therefore Pepsi in this case if Coke advertises Pepsi is better off also advertising someone put a little check there so remember what we're comparing we're comparing 25 to zero because those are Pepsi's two options if Coke advertises now the next question becomes art well what if Coke doesn't advertise if Coke doesn't advertise Pepsi has again two options they can either earn sixty dollars by advertising or they can earn fifty dollars by not advertising sixty is greater than fifty so they should do that one put a little check mark by that now what we notice here is that regardless of what Coke does when Coke advertises Pepsi should advertise with Coke doesn't advertise guess what Pepsi should advertise still so Pepsi has a dominant strategy Matt Thomas strategy is to advertise always advertise so we now know what Pepsi is gonna pick Pepsi is going to advertise that is their dominant strategy regardless of what Coke does again cuz 25 is greater than zero so they advertise sixty is greater than fifty again they'll advertise so that's how you find Pepsi or the horizontal axis alright coca-cola we're going to do the exact same thing okay except now we're gonna be looking at the second number so in this case we now want to know well what should Coke do if Pepsi advertises so now I want you to notice that we're comparing horizontal numbers that's that's the trickiest thing to remember is whether you're going vertical or going horizontal so in this when we were doing Pepsi over here we're comparing two vertical numbers right because Coke was advertising so you want to know what should Pepsi do when Coke advertises now it's the opposite we want to know what should Coke do when Pepsi advertise something's we have to stay in this horizontal row okay so we're gonna be comparing $25 if Coke advertises to $0 if Coke chooses not to advertise again clearly $25 is greater than zero so if Pepsi advertises Coke is better off also advertising okay if Pepsi decides not to advertise where you can pair again $60 here for Coke or fifty dollars for Coke 60 if they advertise also 50s they don't advertise so 60 is greater than 50 so that's going to be Coke strategy now what do we notice for Coke both of them are in the advertised column so for Coke always advertising is better than not advertising this means that Coca Cola also has a dominant strategy that dominant strategy is to advertise I'm going to put the check mark above there so what's going to happen in our payoff matrix we're going to end up in this first quadrant where they were both going to earn a profit of $25 because that is their dominant strategy one thing I didn't touch on and I probably should have in the intro video notice that this is not the best outcome for Coke and Pepsi is it the best outcome is if the best joint outcome is if neither of them advertise they've each earned $50 profits double the profits and earn with their dominant strategies but their dominant strategy is based on that idea if they don't advertise and the other one does advertise their profits go to zero and as a result of that and the fact that zero is less than 25 and the fact that 50 is less than 60 they're both enticed to advertise which is actually going to cause their profits to drop in the long run because that huge amount of money that they now have to spend on commercials and advertisements all right so that's the basic idea so here you have an example where both Coke and Pepsi have a dominant strategy so our market will be an equilibrium in this quadrant here of $25 profit for each one all right until next time this has been the money production

Channel: Carey LaManna

Views: 13,461

Rating: 4.9047618 out of 5

Keywords: LaMoney, LaMoney1313, AP, Advanced Placement, AP Micro, AP Econ, AP Economics, Micro, Econ, Economics, ACDC, Krugman, Mankiw, Gwartney, McConnell

Id: 1ssyHnaUxn0

Length: 7min 2sec (422 seconds)

Published: Wed Nov 15 2017