Lecture 3

Question 1

Coordination game meaning

Answer 1

Players have to coordinate their decisions to reach the outcome that is best for all of them

Question 2

What is Strategic interaction

Answer 2

Situation where my choice affects others’ payoff and others’ choices affect my payoff

Question 3

Game theory explanation

Answer 3

Formal way to analyze strategic interaction among a group of rational players who behave strategically

Question 4

What can you formulate by studying game theory

Answer 4

effective strategy, predict outcome of strategic situations, select and design the best game for us to be played (identify, organize and understand behaviours)

Question 5

What is a Game?

Answer 5

Situation with two rational players, each players have more than one choice, outcome depends on strategy chosen by all players (strategic interaction)

Question 6

3 steps of analysis

Answer 6

1. Problem formulation
2. Model building
3. Decision

Question 7

What do you do in “Problem formulation” step of analysis?

Answer 7

Formulate the questions we want to answer E.g. “is it a good ideea to lower prices?”

Question 8

What do we do in “Model building” step of analysis?

Answer 8

Answer questions:
1. Who are the players?
2. What are the actions available, what is the timing associated with the actions
3. What info is available for each
4. What are the strategies
5. What are the payoffs

Question 9

What do we do in “Decision” step of analysis?

Answer 9

Use game theoretic analysis

Question 10

Simultaneous strategic interaction meaning

Answer 10

players act at the same time in ignorance of the others’ current actions

Question 11

Sequential strategic interaction meaning

Answer 11

players make alternating moves

Question 12

What is required in case of simultaneous decisions

Answer 12

Coordination

Question 13

How Game theory denies - SET theory?

Answer 13

What I choose to do depends on what I expect for others to do and it does have an affect

Question 14

Backward induction

Answer 14

Way of solving decision making in finite sequential game (decision tree)

Question 15

What is the best response to games

Answer 15

Strategy that maximizes my payoff given others’ strategies

Question 16

Dominant strategy meaning

Answer 16

its the best strategy whatever
the other player does

Question 17

Nash equilibrium

Answer 17

Set of strategies, one for each player, such that each player’s strategy is a best response to others’ strategies

Question 18

What is the Game theory problem

Answer 18

There is always incentive to cheat

Question 19

What is game theory used for?

Answer 19

It is a tool to model strategic interactions between
economic agents, and deals with interdependence and uncertainty

Question 20

Three assumptions of game theory

Answer 20

-Players aim to maximize their payoffs

-Rationality – players are perfect calculators

-Common knowledge – each player knows the rules of the game

Question 21

Commitment meaning in game theory

Answer 21

The process whereby a player irreversibly alters the pay-offs in advance so that it will be in his own interest to carry out a threat

Question 22

Iterated prisoner’s dilemma meaning

Answer 22

Two players play the game many times. In each round each player
has to choose to either co-operate or defect. In making that choice, each player can take into account what the other player did in previous rounds