Topic 5 Key Concepts

Question 1

Sequential game with perfect information

Answer 1

Sequential game: Games with a strict order of play where at least one player has some information about his opponents’ choices (history) when he has to make a decision.

Perfect information: players know everything (complete history) that has happened prior to making a decision
We represent sequential games with perfect information in its extensive form

Question 2

Strategy of a player in a sequential game

Answer 2

Complete plans of action contingent on the information available at each moment of the game. In a sequential game, contingent on all possible combinations of actions made by players who acted at earlier nodes.
In a perfect information sequential game, a strategy is a function that assigns an action to each decision node of a player.

Question 3

Perfect Nash Equilibrium

Answer 3

A Nash equilibrium which satisfies the principle of Sequential Rationality is called a Perfect Nash Equilibrium (PNE).

Question 4

Backward induction in finite sequential games

Answer 4

In finite sequential games the PNE are computed by BACKWARD INDUCTION, that is, solving the game from the end until the initial node

Question 5

Strategic moves: threats, promises and commitments

Answer 5

Strategic moves are devices to manipulate the rules of the game. 3 types of strategic moves: commitments, threats and promises. The aim of all three is to alter the outcome to your own advantage.
A commitment or unconditional move is a (response) rule in which you move first and your strategy is fixed (irrevocable). Is intended to gain first-mover advantage.
Threats and Promises occur when you move second: they are response rules. Different from the best response in the original game, conditional on what the other side does.
(should be communicated before the other player moves). Are intended to gain second mover advantage.

Question 6

Credibility of a strategic move

Answer 6

3 types of strategic moves: commitments, threats and promises. All require CREDIBILITY: the other player must believe that you will follow through. A threat (and a promise) is credible only if it is in your self-interest (or you have no other option).
How to make promises credible?
1. Limiting your strategic freedom, in a way that you have no other option but to follow through the strategic move.
2. Changing your future payoffs, in a way that to follow through the strategic move is payoff-maximizing for you.