Game Theory Flashcards
Game Theory
Theory of economic strategic behavior when people interact directly rather than through the market.
What does Game Theory allow us to do?
Examine strategic behavior (people making decisions taking into account other people’s actions)
Rules of the Game: Players
Who is interacting?
Rules of the Game: Strategies
What are the options?
Rules of the Game: Timing of Decisions
Sequential or simultaneous?
Rules of the Game: Payoffs
Maximizing or minimizing what?
Rules of the Game: Information
What do they know?
Nash Equilibrium
When each party is doing their best response to the other player’s decision
Nash Equilibrium occurs when…
You have two stars in the same cell
Pareto Efficiency
situation where no action or allocation is available that makes one individual better off without making another worse off
What is the market failure in the Prisoner’s dilemma?
Each player only takes into account how it benefits themself, not considering how it hurts the other
How can individuals get themselves out of the PD and how can this equilibrium change?
- Mafia (consequences for betrayal)
- One time interaction/no future relationships
Is the PD solution Pareto efficient from the player’s perspective?
The PD solution isn’t the optimal solution from the player’s perspective
