Strategic choice and game theory week 2 Flashcards
Game - definition
A situation in which players (participants) make strategic decisions that take into account each other’s actions and responses
Payoff - definition
Value associated with a positive outcome
Strategy - definition
Rule or plan of action for playing a game
E.g., if my competitor lower his price, I will lower mine even more
Optimal strategy - definition
Strategy that maximize a player’s expected payoff
Solution concept - strategic decision making and game theory
Key to the solution of game theory problem is the anticipation of the behaviour of others
Equilibrium definition
When no peoples have an incentive to further adjust their strategies.
No player is able to improve his or her payoff by unilaterally changing their strategy (already reached their maximum strategy)
Simultaneous move games explained
- Moves are hidden
- Moves are only seen by other players when all the players have made their moves
Dominant strategy definition
A strategy where payoff in any outcome is higher relative to all other feasible strategies
- Optimal regardless of the strategies selected by rivals
- We expect players to choose dominant strategies if they have them
What is a DSE (Dominant Strategy Equilibrium)?
A dominant strategy equilibrium is when all players have a dominant strategy
What is a Nash equilibrium
A Nash equilibrium is a combination of strategy choices that are at least ‘best’ responses to each other (even if not best responses to all the possible choices of the other players)
- This equilibrium is rational, optimal and stable
What is a Pareto superior outcome?
A Pareto superior outcome in game theory occurs when a change in allocation makes at least one player better off without making any other player worse off.
Example, there are two nash equilibriums 7,7 and 12,12 if Firm one choices to improve his strategy to 12, this will make both players better off as the other would also switch to 12
Coordination Games characteristics
- These games have more than one equilibrium
- Players cannot communicate
- Players have asymmetric information in relation to how the other player choose.
Example: If there are two Nash equilibria but both players prefer different equilibria (200,150 and 150,200). Both equilibria preferred to any other outcome.
- In this case the first-mover has an advantage
Games of pure conflict: strictly competitive games explained
Games of pure conflict, also known as zero-sum games, are scenarios in game theory where one player’s gain is exactly equal to the other player’s loss. The total payoff remains constant, meaning the interests of the players are completely opposed, and any advantage gained by one comes directly at the expense of the other.
- There may be no equilibrium
- Likely to be a first-mover disadvantage
- Players do not want to be predictable
Why is game theory useful?
Game theory is a theoretical tool that is used to analyse decisions when there is interdependence between agents
