Game Theory Flashcards
Game theory definitions:
The tool used to analyze strategic behavior—behavior that recognizes mutual interdependence and takes account of the expected behavior of others.
Three features of a game:
- Rules
- Strategies
- Pay off
What is the prisoners dilemma?
A game between two prisoners that shows why it is hard to cooperate, even when it would be beneficial to both players to do so.
What is a strategy?
all the possible outcomes of each player.
Pay offs/ pay off matrix shows
shows the payoffs for every possible action by each player given every possible action by the other player.
What is the Nash equilibrium?
An equilibrium in which each player takes the best possible action given the action of the other player.
(Not the best outcome)
Dominant Strategy:
A strategy that results in the highest payoff to a player regardless of the opponents action
(if you have one, always play it)
Secure Strategy:
A strategy that guarantees the highest payoff given the worst possible scenario
What to do if you do not have a dominant strategy?
See if your opponent has one and anticipate they will use it.
What is a tit for tat strategy (In a repeated game)
one in which one player cooperates this period if the other player cooperated in the previous period but cheats in the current period if the other player cheated in the previous period.
Trigger strategy (repeated game_
which a player cooperates if the other player cooperates but plays the Nash equilibrium strategy forever thereafter if the other player cheats.
What is a price war and how might it come to be?
Price wars might result from a tit-for-tat strategy where there is an additional complication—uncertainty about changes in demand.
A fall in demand might lower the price and bring forth a round of tit-for-tat punishment.
