Question

Some Conceptual Questi on s 1. Briefly explain the logic be hind backward induction, our approach to solving se quen tial (dynam ic) games. Use the difference between Cournot and Stackel berg duopoly as an example.

Answer 1

Backward induction

Backward induction is the action of reasoning the backwards in time. It is carried out in order to find out the set of optimum measures. The time in the problem is taken from the last. Backward induction is taken from the end time of the decision taken regarding a problem and with that data, decides what measures and better steps should be taken in the next time for the same problem.

When we solve sequential games with the help of backward induction, the numbers which can be seen at the downward portion of the tree can be considered as the payoffs that are received at those corresponding points. In such a game, the optimum strategy of a player will be to watch the other player's last move. Based on that, we will make his next decision. This backward induction will be continue till a best result arises out of this process.

Cournot and Stackelberg model of duopoly

According to the Cournot and Stackelberg model of duopoly, take the case of two sellers 'P' and 'Q'. Here there will be two assumptions that :-

1.) P is a duopolist and believe that Q will perform as per P's outcome.

2.) Q will act in this way

Hence, P will be output leader because he opt the output that he manufacture on the belief that Q will act on the basis of P's actions and Q is output follower because he will be at a position to accept whatever output which has been manufactured by P.