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Chapter Review Chapter 14: Strategic Behavior

  1. In perfectly competitive markets, firms and consum¬ ers can decide how much to produce and how much to consume without taking into account how others might react. In imperfectly competitive markets, firms must take into account how their rivals will respond to the firms’ production or pricing decisions. Firms must behave strategically in such situations. Individuals also face many situations in which they must behave stra¬ tegically. Economists use game theory to predict how individuals and firms will behave.
  2. In a Nash equilibrium, each player in a game is fol¬ lowing a strategy that is best, given the strategies followed by the other players. A game may have a unique Nash equilibrium, or it may have several equilibria.
  3. A dominant strategy is one that is best regardless of what the other player chooses to do. Looking for dominant strategies can help analysts predict behavior.
  4. Backward induction is crucial for strategic behavior. Thinking strategically means looking into the future to predict how others will behave, and then using that information to make decisions.
  5. Strategic choices are often designed to influence the choice of others. Once others have made their choices, however, carrying out the initial strategy may no longer be best. When this is the case, the original strategy was time inconsistent.
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