Economics Game Theory Questions Medium
In game theory, strategic substitutes refer to a situation where the strategies chosen by one player are negatively related to the strategies chosen by another player. This means that when one player chooses a particular strategy, it reduces the incentive for the other player to choose the same strategy.
Strategic substitutes arise when players have conflicting interests or goals. In such cases, players tend to adopt strategies that are different from each other in order to maximize their own payoffs. This can be seen in various economic scenarios, such as competition between firms or bidding in auctions.
For example, in a duopoly market where two firms compete with each other, if one firm chooses to lower its prices, it creates an incentive for the other firm to increase its prices. This is because the lower prices chosen by one firm reduce the potential profits of the other firm, leading to a strategic substitution of pricing strategies.
Similarly, in an auction setting, if one bidder increases their bid, it reduces the incentive for other bidders to bid higher. This is because the increased bid by one player reduces the potential payoff for other players, leading to a strategic substitution of bidding strategies.
Overall, the concept of strategic substitutes highlights the interdependence and strategic decision-making of players in game theory. It emphasizes that the strategies chosen by one player can have a direct impact on the strategies chosen by others, leading to a complex and dynamic interaction between players.