International Trade

Application of Game Theory to International Trade

Introduction

Game Theory is a general mathematical analysis to investigate the strategic interactions among players.

The structure of a game is as follows:



  • In our examples, we will assume that there are two players, and that each has two choices.
  • We assume that the players are selfish (operate in their own best interests) and rational (choose the best options available).
  • A strategy is the object that a player can control.
  • A payoff is the profit from a given pair of choices.
    In our examples, we use the notation (m, n) to indicate a payoff of m to player 1 and n to player 2 as a result of a particular pair of choices.
  • An equilibrium point is a pair of choices (one by each player) where neither player can improve their own position by changing their choice unilaterally.
  • Application and Examples

    Games with Dominant Strategy Equilibrium

  • Cartel
  • Prisoner's Dilemma
  • Application to International Economics: Free Trade and Protection


  • Games with Nash Equilibrium

  • Battle of the Sexes
  • Game of Chicken


  • Strategic Trade Policies using Game Theory

  • Airbus and Boeing
  • Monopolist and New Entrant in the World Market
  • Imperfect Information



  • [Back] Dumping (Persistent)
    [Next] Games with Dominant Strategy Equilibrium
    [Topic] Trade Policies


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    [mtcha@ecel.uwa.edu.au]
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