Medical Arms Race and Game Theory in Economics

Box 14-1 on page 288 of FGS describes how game theory helps explain the “medical arms race” among hospitals up to about 20 years ago.

(1) Explain what a “dominant strategy” is in game theory. ;

(2) Using Box 14-1, replace the entry in the first row, second column with (125, -50). ;Does A have a dominant strategy? ;Does B? ;What is the solution to this game? ;

(3) Why is the medical arms race less a problem today than it once was? ;

(Tip: In order to determine what strategy a “player” should adopt, the player asks, “If B adopts, then what should I do? ;If B does NOT adopt, then what should I do?” ;Both players in the game approach the selection of their strategy in this way.)