Game theory Flashcards
What are some examples of interactions that do not take place in competitive markets?
Allocation problems (e.g., social housing)
Contracts & Agreements (e.g., between firms or individuals)
Advertising and Public Relations
Hiring decisions, Job search, Assignment problems
Strategic choices of firms, such as mergers or acquisitions
Bargaining problems (e.g. unions vs employers)
What is a static game?
Static games in which players act once and simultaneously
What is a dynamic game?
Where players move either repeatedly or sequentially
What are the assumptions we make on players abilities, knowledge and motivations?
Players are rational and self-interested and maximise their payoffs
- They have common knowledge
- they have complete information
Which number in the game theory table responds to player 1?
The first number is the payoff for player 1
How do firms try and maximise their profits for game theory?
Firms try to maximise their payoff based on its belief about rivals behaviour
How do rational agents act?
They maximise their own payoff avoiding dominated strategies
What is a dominated strategy?
A strategy that produces a lower payoff than some other strategy for every possible combination of its rivals strategies
What is the relevance of the prisoners dilemma?
Illustrates a situation where self-interested behaviour leads to suboptimal outcomes
What are the two key properties of the Nash equilibrium?
-Each player maximises her payoff given her belief about the other players choices
- Each player correctly anticipates the others actions
What is a Nash equilibrium?
The Nash equilibrium is where no player can obtain a higher payoff by being the only one to choose a different strategy
How do you find the best response for player 1?
Fix the column of the opponent and choose the row which gives the highest payoff
What is suggested about noncooperative firms?
They may not reach the joint-profit maximising outcome in equilibrium
What is a network externality?
Each group benefits more from using the platform the more people there are in other groups using it
What is balanced pricing?
Both merchants and consumers pay fees
What is unbalanced pricing?
Only merchants pay fees
What is true of many oligopoly games?
Many oligopoly games have more than one Nash equilibrium
What is the self-enforcing agreement?
Firms negotiate and discuss which equilibrium they should play prior to choosing their action
Why is a Nash equilibrium sometimes unappealing?
Because they call for identical firms to use different strategies
How does a mixed strategy Nash equilibrium differ to a pure strategy Nash equilibrium?
Pure strategy assigns a probability of 1 to a single action. Mixed strategy is a probability distribution over actions.
How does a player choose a mixed strategy, Nash equilibrium?
Each player chooses the probabilities of their actions, so that the other player or players are indifferent between the actions and their mixed strategy
What is true about a Nash equilibrium under a mixed strategy?
With a mixed strategy, a Nash equilibrium always exists
What are extensive games?
Each move can be dependent on previous ones
What is an extensive game characterised by?
- A set of players
- Histories
- Player functions
- Payoffs at each terminal histories
What is a strategy for a player in an extensive game?
A complete set of instructions that specifies an action for all possible turns of a player
What is a Nash equilibrium under an extensive game?
The same as before, if no player can be better off by unilaterally changing his/ her own strategy given the other players strategies
How does the notion of subgame perfect equilibrium refine the Nash equilibrium?
It rules out non-credible threats
What is a subgame perfect equilibrium?
A Nash equilibrium which has the property that it constitutes a Nash equilibrium in the continuation play at every stage throughout the game irrespective of what has happened in the past
