Chapter 7 - Games and Strategies

Question 1

interdependent decision making

Answer 1

occurs when the payoff depends not only on its own decision but also on the decision of another player

Question 2

game

Answer 2

is a stylized model that depicts situations of strategic behaviour, where the payoff of one agent depends on its own actions as well as on the actions of other agents

Question 3

a game consists of…

Answer 3

• a set of players
• a set of rules and actions
• a set of payoff functions
  each player’s payoff is a function of the strategic choice by both players

Question 4

simultaneous game theory

Answer 4

both players choose their strategies at the same time

Question 5

dominant strategy

Answer 5

a strategy that is better than any other strategy regardless of the other players’ strategy choices

Question 6

prisoner’s dilemma

Answer 6

situation in which each individual pursues their own self-interest, and the outcome is worse than if they had both cooperated
joint payoffs would be higher if both players cooperated

Question 7

dominated strategy

Answer 7

a dominated strategy yields a payoff which is lower than that of a different strategy, regardless of what other players do
If player 1 has a dominated strategy all we know is that it will not choose that strategy
“strategy A is dominated by strategy B”

Question 8

it is not only important whether players are rational: it is also important whether players believe the other players are rational

Question 9

Nash equilibrium

Answer 9

determines the optimal solution in a non-cooperative game in which each player lacks any incentive to change his/her initial strategy.

Question 10

best response

Answer 10

a mapping that indicates a player’s best strategy for each possible strategy by the other player

Question 11

multiple Nash equilibria

Answer 11

players want to coordinate
there is more than one point of coordination
players disagree over which of the two coordination points is better

Question 12

focal points

Answer 12

focal point is a solution that people tend to choose by default in the absence of communication

Question 13

sequential game

Answer 13

based on the decision and first move of player 1, player 2 makes their decision moving based on player 1

Question 14

game tree

Answer 14

a decision tree, with ore than one decision maker involved

Question 15

decision node

Answer 15

player must make a choice at each decision node

Question 16

decision node

Answer 16

player must make a choice at each decision node

Question 17

backward induction

Answer 17

we solve the game backwards
we first consider node 2, and conclude that the optimal decision is r dash. Then we solve for the decision in node 1 given the decision previously found for node 2

Question 18

subgame-perfect equilibria

Answer 18

subgame (=part) of a larger game

we first solve the equilibria for the subgame, and then given the solution, solve for the entire game

Question 19

credible commitment

Answer 19

example: an enforceable and not negotiable contract, whereby if player 1 chooses a, then player 2 must choose b. contract will incur a penalty if player 2 chooses something else

Question 20

a credible commitment may have significant strategic value

Question 21

choosing short-run and long-run variables

Answer 21

short-run: pricing
long-run: capacity decisions
players choose the long-run variable first and the short-run variable second
short-run variables are those that players choose given the value of the long-run variables

Question 22

retaliation

Answer 22

the situation whereby a player changes its strategic variable in response to a rival’s actions

Question 23

one-shot games

Answer 23

player chooses action only once

Question 24

repeated games

Answer 24

is defined by a one-shot game which is repeated a number of times

Question 25

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

Question 26

δ is the probability that the game keeps on

Answer 26

if the propability that the game continues on into the next period, δ, is sufficiently high, then there exists a Nash equilibrium, whereby players pick their optimal strategy in every period

Question 27

relational contracts

Answer 27

high-value transactions that are based on unwritten contracts

Question 28

Nature

Answer 28

in order to model games where there is uncertainty and asymmetric information, we introduce a new “player” into the game: Nature
Nature has no strategic motives, and its actions are limited to choosing different branches of a game tree according to predetermined probabilities

Question 29

the order of nature in the game

Answer 29

if Nature is involved then changing the order of moves changes the nature of information, that is, who knows what when

Question 30

standard games with asymmetric information

Answer 30

an uniformed player must make a move before the informed player gets to make its move
adverse selection results from models where the uninformed party makes the first move

Question 31

signalling games

Answer 31

asymmetric information games where the informed party moves first