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Respond to the question: Determine a Price using Game Theory?

02/24/2017 08:42 AM by Kris; Determine a Price using Game Theory
Hi All!

I was wondering if anyone could help me out with a game theory question:

My game involves two opposing players, M and W.

Ms objective is to pay the smallest amount. Ws objective is to gain the biggest amount.

M has to make a decision as to weather or not he should ask a fortune teller for advice, or take the advice of W.

W is right 90% of the time. The fortune teller is right 100% of the time.

If M asks the fortune teller, and the fortune teller and W say the same thing, it will cost M $15,000.

If the fortune teller and W do not say the same thing, it will cost W $15,000.

M has the option of exiting the game by paying W a fee.

The question is :

What price should W set so that M could exit the game?


Logically, I see this as $14,999. However that is not rational, as Ms benefit to W would not be tolerated for $1.

So I see the question as then becoming what is a reasonable discount from $15,000 that M would consider to be a greater benefit to himself.

Instinctively I see this as 75% of $15k as I feel 50% would be a loss for W.

Can anyone direct me or advise me on the best logical approach to take on this?
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