Session 5

Question 1

What is a strategic interaction?

Answer 1

A situation where your best choice may depend on choices of others, and vice versa

Question 2

If applying strategic thinking, what do you need to do?

Answer 2

1. Understand the game we’re playing, which is defined as a strategic interaction that specifies:

a. All the possible players: who is interacting with whom
b. The feasible strategies: which actions are open to the players
c. The payoffs: what the outcomes will be for each of the possible combinations of actions

2. Do our best to figure out or best response
   - Best response: the choice that yields the highest payoff given the other player’s choice

Question 3

Whats a static game?

Answer 3

A game thats played simultanously.

• Simultaneous move: when a player makes a decision, she does not know what the other person has decided to do

Question 4

Whats a dynamic game?

Answer 4

A game where players move repeatedly or sequentially.

• Repeated game: same interaction may occur more than once
• Sequential game: not all players choose their strategies at the same time

Question 5

Whats a prisoners dilemma?

Answer 5

A game with two players simultanously moving without knowing each others response.

Question 6

Whats the players best response?

Answer 6

The best alternative strategy for each strategy of the opponent.

Question 7

Whats a Nash Equilibrium?

Answer 7

An Equilibrium in which the choice that each player makes is a best response to the choices other players are making.

->No single player can unilaterally deviate to improve their standing

• One way to find nash equilibria is to look for cells in the payoff table where best responses intersect

Question 8

Whats the tragedy of the commons?

Answer 8

Refers to the tendency for common resources to be overutilized.

Question 9

What are Coordination games?

Answer 9

A class of games with multiple equilibria (Example: protesting)

Question 10

What are good and bad Equilibria?

Answer 10

In some games with multiple equilibria, it is clear that some equilibria are good and others are bad. (Example: Bank run)

-> you have to apply concept of pareto dominance and efficiency to compare these

Question 11

Whats an pareto dominant outcome?

Answer 11

An economic outcome (A) pareto dominates outcome (B) if at least one player would be better off with (A) than (B), and nobody would be worse off.

Question 12

What is an pareto efficient outcome?

Answer 12

A pareto efficient outcome is not pareto dominated by any other outcome. I.e., nobody can be made better off

Question 13

What are challenges to coordination and what are solutions?

Answer 13

Coordination is challenging because there’s more than one equilibrium

Some possible solutions

• Pre-play communication: players discuss strategies before deciding
• Focal points and norms: relying on cultural or societal conventions
• Formal rules: setting rules or contracts to guide decision

Question 14

When are challenges to coordination less bad?

Answer 14

In games with clear good and bad equilibria. Pareto dominant equilibria tend to be played more often

Question 15

What are sequential games?

Answer 15

• In a sequential game, players don’t move simultaneously
• Late movers can see what action early movers have taken
• To better appreciate the sequential nature of play, these games are better represented in an extensive form

Question 16

What is the extensive form?

Answer 16

A representation of a game by a “game tree” which shows the players, who moves when and which actions are available and the payoffs

• Points on the tree show when players make decisions
• Branches from each point indicate the available decisions at that point
• Tree ends represent payoffs

Question 17

How do you find Nash Equilibria in sequential games?

Answer 17

Finding Nash equilibria in sequential games require backward induction, which involves:

• Starting from a games end and determining optimal strategies for the last moves
• Working backward through each decision point to the games start, ensuring each players best response at every stage

Question 18

What is first mover advantage?

Answer 18

Sequential games often feature a first mover advantage: by selecting the branch of the tree that’s played, first movers can rule out paths of play that are especially disadvantageous

Question 19

What is collusion?

Answer 19

An agreement by rivals to not compete with each other but to all charge high prices instead.

Time (Game repitition) can facilitate collusion

Question 20

What is a One-Shot game?

Answer 20

a strategic interaction that occurs only once

Question 21

What is a finitely repeated game?

Answer 21

when you face the same strategic interaction a fixed number of times

Backward induction applies to finitely repeated games, but not to indefinitely repeated games, bc there is no last period!

Question 22

What is a indefinitely repeated game?

Answer 22

when you face the same strategic interaction an unknown number of times.

(Indefinitely games resemble life, as the continue until they unexpectedly end, with no clear indication of the final round) Various factors can suddenly reveal the games end (natural events, technological innovations, economic forces, regulations, etc.) -> such revelations alter the strategic incentives for economic actors

!Backward induction applies to finitely repeated games, but not to indefinitely repeated games, bc there is no last period.

Question 23

What is the folk theorem?

Answer 23

Sometimes, in indefinitely repeated games, very punitive strategies can allow players to enact collusion and maximize their pie

Question 24

What is grim trigger?

Answer 24

• Most effective extreme punitive strategy is called grim trigger, which involves defecting forever after the opponents first defection (When the smooth get chunky, the chunky forever get smooth)