Econ 101: Chapter 18 Flashcards
Game theory
the science of making good decisions in situations involving strategic interactions.
Strategic interactions
when your best choice may depend on what others choose, and their best choice may depend on what you choose.
4 steps to make good strategic decisions
Consider all possible outcomes, think about the “what ifs” separately, play your best response, put yourself in someone else’s shoes.
Pay off table
a table that lists your choices in rows, and the other player’s choices in columns, listing the payoffs in each cell.
Best response
the choice that yields the highest payoff for you, given the other player’s choice.
Prisoner’s Dilemma
both rational agents can cooperate for mutual benefit, or betray their partner for individual benefit.
Nash equilibrium
an equilibrium in which the choice that each player makes is a best response to the choices that other players are making.
Check mark method
the outcome with a checkmark from each player is a Nash equilibrium
in the Prisoner’s Dilemma, the equilibrium is where…
both players fail to cooperate (both defect).
in the Prisoner’s Dilemma, each player’s expectation about what the other player will choose is…
correct.
Agreements to cooperate are not… (Prisoner’s Dilemma)
credible.
In the Prisoner’s Dilemma, the equilibrium is not…
the best outcome (market does not yield good outcome).
Prisoner’s Dilemma: the temptation to…
take advantage undermines cooperation.
Strategic interactions lead people to make strategic choices that…
lead to inefficient outcomes.
Multiple Equilibria
when there is more than one equilibrium
Coordination game
when both players have a common interest in coordinating their choices (make complementary choice to the other player).
Anti-coordination game
when your best response is to take a different (but complementary) action to the other player.
there can be situations where there is a
good and bad equilibrium.
Solutions to coordination problems
communication, focal points, culture, norms, and laws + regulations
Communication
works when you both want the same thing, to coordinate on the same equilibrium.
Does not work when players have opposing incentives (Prisoner’s Dilemma).
Focal point
a cue from outside the game that helps you coordinate on a specific equilibrium.
(e.g. social conventions).
Laws and regulations
the law will decide where the equilibrium is.
sequential games
games where you can see your rival’s action before choosing yours, or they can see your action before choosing theirs.
Simultaneous game
you choose without knowing the other player’s choice (vice versa)
first mover advantage
the strategic gain from an anticipatory action that can force a rival to respond less aggressively.
the gain the first mover advantage, you must…
credibly commit to your move.
Game tree
shows how a game (all possible outcomes) plays out over time.
figuring out your best outcome requires you to:
look forward and reason backward.
look forward
anticipate the likely consequences of your decisions.
reason backward
start by analyzing the last period of the game.
Prune the tree method
a method for solving game trees.
the first movers advantage is about…
the benefits of commitment (you commit to an aggressive position, forcing your rival to be less aggressive).
second mover advantage
the strategic advantage that can follow from taking an action that adapts to your rival’s choice.
the second mover advantage is about…
flexibility (can adapt your strategy to the choices made by the first mover).
Collusion
an agreement to limit competition; rivals agree to all charge high prices.
One shot game
a strategic interaction that occurs only once (don’t need to worry about how others will treat you in the future).
repeated game
when you face the same strategic interaction with the same rivals and the same payoffs in successive periods.
finitely repeated game
when you face the same strategic interaction a fixed number of times.
The Prisoner’s Dilemma yields ____ in a finitely repeated game.
uncooperative outcomes.
indefinitely repeated game
when you face the same strategic interaction an unknown number of times.
strategic plan
a list of instructions that describes exactly how to respond in any possible situation.
Grim trigger strategy
- if the other players have cooperated in all previous rounds, you will cooperate.
- But if any player has defected in the past, you will defect.
In a indefinitely repeated game, the Prisoner’s Dilemma can yield a…
cooperative outcome/equilibrium
____ drives cooperation in indefinitely repeated games as ____
punishment, your rival can refuse to cooperate with you again in the future.
