Chapter 7 - Games and Strategies Flashcards
interdependent decision making
occurs when the payoff depends not only on its own decision but also on the decision of another player
game
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
a game consists of…
- 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
simultaneous game theory
both players choose their strategies at the same time
dominant strategy
a strategy that is better than any other strategy regardless of the other players’ strategy choices
prisoner’s dilemma
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
dominated strategy
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”
it is not only important whether players are rational: it is also important whether players believe the other players are rational
Nash equilibrium
determines the optimal solution in a non-cooperative game in which each player lacks any incentive to change his/her initial strategy.
best response
a mapping that indicates a player’s best strategy for each possible strategy by the other player
multiple Nash equilibria
players want to coordinate
there is more than one point of coordination
players disagree over which of the two coordination points is better
focal points
focal point is a solution that people tend to choose by default in the absence of communication
sequential game
based on the decision and first move of player 1, player 2 makes their decision moving based on player 1
game tree
a decision tree, with ore than one decision maker involved
decision node
player must make a choice at each decision node
decision node
player must make a choice at each decision node
backward induction
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
subgame-perfect equilibria
subgame (=part) of a larger game
we first solve the equilibria for the subgame, and then given the solution, solve for the entire game
credible commitment
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
a credible commitment may have significant strategic value
choosing short-run and long-run variables
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
retaliation
the situation whereby a player changes its strategic variable in response to a rival’s actions
one-shot games
player chooses action only once
repeated games
is defined by a one-shot game which is repeated a number of times
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
δ is the probability that the game keeps on
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
relational contracts
high-value transactions that are based on unwritten contracts
Nature
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
the order of nature in the game
if Nature is involved then changing the order of moves changes the nature of information, that is, who knows what when
standard games with asymmetric information
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
signalling games
asymmetric information games where the informed party moves first
