Core lesson
Strategic Interaction Studio
Simulate repeated games, signaling, and screening problems with contemporary policy and business examples.
What you will learn
- Differentiate simultaneous and sequential games
- Design payoff matrices that reflect modern platform rivalry
- Test trigger strategies for sustaining cooperation
Start with a real question
Why can two firms start a price war even when both would earn more by keeping prices stable?
Core concept
A payoff matrix makes each player's incentives explicit. A dominant strategy is best regardless of the rival's move; a Nash equilibrium has no profitable unilateral deviation.
| Rival: hold | Rival: cut | |
|---|---|---|
| You: hold | 8, 8 | 2, 11 |
| You: cut | 11, 2 | 4, 4 |
Data connection
FDI flows proxy the payoff to cooperation vs. defection in strategic alliances.
Foreign direct investment, net inflows (% of GDP) · BX.KLT.DINV.WD.GD.ZS
Worked example
Step through it
If both firms keep prices high they earn 8 each; if one cuts it earns 11 while the other earns 2; if both cut they earn 4 each. Cutting is dominant, so (cut, cut) is the Nash equilibrium.
Mini practice
- Identify the equilibrium in the worked example.
- Is every Nash equilibrium socially efficient?
- What could sustain cooperation in a repeated game?
- Both firms cut price and earn 4 each.
- No. Stable high prices give both firms higher payoffs in this example.
- Future punishment, reputation, and repeated interaction can change current incentives.
Common mistake
Choosing the highest total payoff and calling it a Nash equilibrium.