Chapter 7 Flashcards
Game (game theory)
consist of a set of players, a set of rules and actions, and a set of payoff functions
Normal form
A matrix where each cell corresponds to a combination of strategic choices by each player, with the payoff received by that strategy
Dominant strategy
a dominant strategy yields a player the highest payoff regardless of the other players’ choices
Prisoner’s dilemma
Depicts the conflict between individual incentives and joint incentives
Dominated strategy
A dominated strategy yields a player a payoff that is lower than that of a different strategy, regardless of what the other players do.
Rationality in game theory
It is not only important whether players are rational; it is also important whether player believe the other players are rational
Absolute and relative payoff
In game theory, rationality means we assume that a player’s goal is to maximize their payoff
Nash equilibrium
A pair of strategies constitutes a Nash equilibrium if no player can unilaterally change its strategy in a way that improves its payoff
Best response
Mapping that indicates a player’s best strategy for each possible strategy of another player.
Focal point
A solution that people tend to choose by default in the absence of communication
Games in extensive form
Games which are represented by trees (sequential)
Backward induction
The process of reasoning backwards in time, from the end of a problem or situation, to determine a sequence of optimal actions
Subgame-perfect equilibria
A refinement of a Nash equilibrium used in dynamic games
Short-run and long-run
The sequence of moves plays an important role when the game under consideration depicts a long-term situation where players choose both long-run and short-run variables.
Long-term there is a strategy, short-term there is an action
Credible commitment
A credible commitment may have significant strategic value. Introducing credible commitment can raise the payoff, which is the value of the commitment.
Retaliation
Situation whereby a player changes its action in response to a rival’s action. This cannot be achieved in a static, simultaneous-move game.
One-shot game
A game in which each player chooses one action only once - also referred to as stage game
Repeated game
Defined by a one-shot game which is repeated a number of times
Games ends with probability: 1- delta
Payoff in repeated game
Total expected payoff is obtained by multiplying payoffs by delta, the probability that the game will continue.
Nash equilibrium if V => V’
One-shot game vs repeated game (equilibrium)
Because players can react to other players’ past actions, repeated games allow for equilibrium outcomes that would not be an equilibrium in the corresponding one-shot game.
Relational contracts
High-value transactions which are based on unwritten contracts
Different interpretations of delta (2)
The game will end infinite time, but it is unknown when. The game ends with probability of 1 - delta.
The game lasts for an infinite number of periods and the players discount future payoffs with the discount factor delta
Nature (player in game theory)
It has no strategic motives, and its actions are limited to choosing different branches of a game tree according to predetermined probabilities.
Added in order to model games where there is uncertainty and asymmetric information
(un)informed player moves first
If an uninformed player has to move first: adverse selection
If an informed player has to move first: signaling game
