Lecture 3 Flashcards
Coordination game meaning
Players have to coordinate their decisions to reach the outcome that is best for all of them
What is Strategic interaction
Situation where my choice affects others’ payoff and others’ choices affect my payoff
Game theory explanation
Formal way to analyze strategic interaction among a group of rational players who behave strategically
What can you formulate by studying game theory
effective strategy, predict outcome of strategic situations, select and design the best game for us to be played (identify, organize and understand behaviours)
What is a Game?
Situation with two rational players, each players have more than one choice, outcome depends on strategy chosen by all players (strategic interaction)
3 steps of analysis
- Problem formulation
- Model building
- Decision
What do you do in “Problem formulation” step of analysis?
Formulate the questions we want to answer E.g. “is it a good ideea to lower prices?”
What do we do in “Model building” step of analysis?
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
What do we do in “Decision” step of analysis?
Use game theoretic analysis
Simultaneous strategic interaction meaning
players act at the same time in ignorance of the others’ current actions
Sequential strategic interaction meaning
players make alternating moves
What is required in case of simultaneous decisions
Coordination
How Game theory denies - SET theory?
What I choose to do depends on what I expect for others to do and it does have an affect
Backward induction
Way of solving decision making in finite sequential game (decision tree)
What is the best response to games
Strategy that maximizes my payoff given others’ strategies
Dominant strategy meaning
its the best strategy whatever
the other player does
Nash equilibrium
Set of strategies, one for each player, such that each player’s strategy is a best response to others’ strategies
What is the Game theory problem
There is always incentive to cheat
What is game theory used for?
It is a tool to model strategic interactions between
economic agents, and deals with interdependence and uncertainty
Three assumptions of game theory
-Players aim to maximize their payoffs
-Rationality – players are perfect calculators
-Common knowledge – each player knows the rules of the game
Commitment meaning in game theory
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
Iterated prisoner’s dilemma meaning
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
