Theme 9 - Game Theory and Strategic Interactions

Question 1

What is a best response?

Answer 1

The strategy maximizing the payoff of a player, given the strategies of the other players.

Question 2

What is a dominant strategy?

Answer 2

A strategy is considered dominant if it yields a higher payoff than any other strategy against all possible strategies chosen by other players.

Question 3

What is an equilibrium?

Answer 3

It’s the solution of the game, the strategies rational players should play if they were all behaving rationally.

Question 4

What is the Nash equilibrium (NE)?

Answer 4

It’s a situation where each player is playing his best response against the other player’s strategy. No single player is better off deviating unilaterally.

Question 5

How to find a Nash equilibrium for a game in matrix form?

Answer 5

1. Determine the best responses to all possible strategies of the other player.
2. Underline in the matrix the payoff corresponding to the best response.
3. If there is a box where both payoffs are underlined, this is a Nash equilibrium

Question 6

Can a player change the nature of strategic interaction?

Answer 6

Yes, by moving first.

Question 7

Is it efficient when players act in their own best interest?

Answer 7

Not always.

Question 8

Is it always advantageous to act first?

Answer 8

No, it depends on the game.