What is a best response function?

What is a best response function?

In game theory, the best response is the strategy (or strategies) which produces the most favorable outcome for a player, taking other players’ strategies as given (Fudenberg & Tirole 1991, p. 29; Gibbons 1992, pp. 33–49). …

What is the best response function of a firm?

To find best response function of firm 1, look at its payoff as a function of its output, given output of firm 2. Any price greater than p2 is a best response to p2: B1(p2) = {p1 : p1 > p2}. Note: a price between p2 and c is a best response!

What is the best response curve?

A reaction curve (or best-response curve) is a graph which shows profit-maximizing output of one firm in a duopoly given the output of the other firm.

How do you calculate best response function?

1. Find the firms’ best response functions. To find the best response of firm 1 to any action a2 of firm 2, fix a2 and solve. maxa1a1(c + a2 a1).
2. A Nash equilibrium is a pair (a1*,a2*) such that a1* = b1(a2*) and a2* = b2(a1*). Thus a Nash equilibrium is a solution of the equations a1* = (c + a2*)/2. a2* = (c + a1*)/2.

What is the difference between best response and dominant strategy?

A best response is a best strategy given what you think the other player will do. A dominant strategy is one that is a best response to all possible strategies.

What is a reaction function in Cournot duopoly model?

The Cournot duopoly model offers one view of firms competing through the quantity produced. The Cournot reaction function describes the relationship between the quantity firm A produces and the quantity firm B produces.

What is the best response in economics?

What Is A Best Response In Economics? In order to win, a player must use the strategy (or strategies) that generates the most rewards for him or her based on what other players are doing. It may prove useful to mark best responses with asterisk (*) in the payoff matrix of larger games.

Why is a worker’s best response function concave?

The best response curve is concave. It becomes flatter as the wage and the effort level increase. This is because, as the level of effort approaches the maximum possible level, the disutility of effort becomes greater.

Can a dominated strategy be a best response?

Answer: True. The strategy that strictly dominates it, by definition, yields a strictly higher payoff against all strategies and hence is a better response.

What is the difference between dominant and dominated strategy?

A strategy is dominant if it leads to better outcomes than alternative strategies, and dominated if it leads to worse outcomes than alternative strategies.

What is the reaction curve of a duopoly?

A reaction curve (or best-response curve) is a graph which shows profit-maximizing output of one firm in a duopoly given the output of the other firm. We can obtain a firm’s reaction curve using the MR R = MC R condition. The equation above expresses the output of Reach in terms of output of Dorne.

How do you find the best response function for firm 1?

Its best output satisfies the condition MR = MC 1, as illustrated in the left panel of the following figure. The corresponding point on firm 1’s best response function is shown in the right panel: when y 2 = 0, firm 1’s best output is b 1 (0). Now increase y 2.

Does revenue depend on the output of a duopolist?

For a duopolist, however, revenue depends on both its own output and the other firm’s output. The solution we apply to this game is that of Nash equilibrium. To think about the Nash equilibria, first consider the nature of the firms’ best response functions.

What is the equilibrium point of a duopoly?

It is the point of intersection of the best-response curves of the rivals in a duopoly. Since both firms need to take the output decision simultaneously, we can find the equilibrium by solving reaction curves of both firms. Substituting the value of QR from Reach’s reaction curve in Dorne’s reaction curve, we get:

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