Game Theory
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What is Game Theory?
Game Theory is the study of multiperson decision problems. Such
problems arise frequently in economics.
Game Theory studies strategic interactions between decision makers.
It has a very general scope, encompassing questions that are basic to
economics as well as to other social sciences. Game theory is now
part of almost every economist’s “tool-kit”. The topics to be covered
in this course include the fundamental concepts of static games,
dynamic games with perfect information; the subjects of bargaining
games, repeated games, auctions; and the more advanced contents of
static Bayesian games, dynamic games with imperfect information.
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The application of Game Theory
For Examples:
Chess, Card Game
Auction and Bargaining game
Political competition
Industrial organization
Oligopolies present multiperson problems: each …rm must consider what
the other will do. But many other applications of game theory arise in
…elds of economics other than industrial organization.
There also are multiperson problems within a …rm: many workers may vie
for one promotion; several divisions may compete for the corporation’s
investment capital.
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The application of Game Theory
For Examples:
International trade
At the micro level, models of trading processes (such as bargaining and
auction models) involve game theory; International economics includes
models in which countries compete (or collude) in choosing tari¤s and
other trade policies;
Macroeconomics includes models in which the monetary authority and
wage or price setters interact strategically to determine the e¤ects of
monetary policy.
etc.
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Game and Game Theory
Games are multi-person decision problems in which one person’s
welfare is a¤ected not by his/her own choice but also by the choice
made by others
Game theory is a collection of tools used to analyze games
Game theory has wide scopes
Game theory is what John Nash has been doing
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Game Theory and Math
Use math to express its ideas formally;
We treat game theory not as a branch of math but as a social science
whose aim is to understand the behavior of interacting
decision-makers; From our point of view, the mathmatical results are
interesting only if they are con…rmed by intuition.
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Questions to ask
What will each individual guess about the other’s choices?
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Questions to ask
What will each individual guess about the other’s choices?
What action will each person take?
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Questions to ask
What will each individual guess about the other’s choices?
What action will each person take?
What is the outcome of these actions?
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Questions to ask
What will each individual guess about the other’s choices?
What action will each person take?
What is the outcome of these actions?
Does it make a di¤erence of the group interacts more than once?
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Questions to ask
What will each individual guess about the other’s choices?
What action will each person take?
What is the outcome of these actions?
Does it make a di¤erence of the group interacts more than once?
what if each individual is uncertain about the characteristics of the
other players?
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Types of games
Noncooperative and Cooperative games
Those in which the sets of possible actioins of individual players are the
primitives
Those in which the sets of possible joint actions of groups of players are
the primitives
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Types of games
Strategic Games and Extensive Games
Players move simultaneously-static model (Solution concept is Nash
Equilibrium)
Players move sequentially according to some order-dynamic model
(Solution concept is Subgame perfect equilibrium)
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Types of games
Games with complete and incomplete Information
Players know all the elements of the game
A Player may be uncertain about some elements of the game (A game has
incomplete information if one player does not know another player’s payo¤,
such as in an auction when one bidder does not know how much another
bidder is willing to pay for the good being sold)
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Some examples:
The Prisoner’s dilemma: Two suspects are arrested and charged
with a crime. The police lack su¢ cient evidence to convict the suspects,
unless at least one confesses. The police hold the suspects in separate cells
and explain the consequences that will follow from the actions they could
take. If neither confesses then both will be convicted of a minor o¤ense
and sentenced to one month in jail. If both confess then both will be
sentenced to jail for six months. Finally, if one confesses but the other
does not, then the confessor will be released immediately but the other will
be sentenced to nine months in jail- six for the crime and a further three
for obstructing justice.
Prisoner 2
deny confess
Prisoner 1 deny 1, 1 9, 0
confess 0, 9 6, 6
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Some examples:
Duopoly Game:
Firm 1
Low price High price
Firm 2 Low price 1, 1 15, 0
High Price 0, 15 5, 5
Contribution to Public Good
distric 2
Free ride Contribute
distric 1 Free ride 1, 1 15, 0
Contribute 0, 15 5, 5
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Some examples:
The Battle of the Sexes: a man and a woman are trying to decide
on an evening’s entertainment. While at separate workplaces, they must
choose to attend either boxing or ballet. Both players would rather spend
the evening together that apart, but the man would rather they be
together at the boxing …ght whilce the woman would rather they be
together at the ballet.
Lady
Boxing Ballet
Gentleman Boxing 3, 1 0, 0
Ballet 0, 0 1, 3
We argue that if game theory is to provide a unique solution to a game
then the solution must be a Nash equilibrium. But it ignores the possibility
of game in which unique solution does not appear. Both (boxing, boxing)
and (ballet ballet) are equally compelling.
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Some examples:
Chicken Game(Hawk-Dove): Two animals are …ghting over some
prey. Each can be passive or aggressive. Each prefers to be aggressive if its
opponent is passive, and passive if its opponents is aggressive; given its
own stance, it prefers the outcome in which its opponents is passive to
that in which its opponents is aggressive.
animal 2
agressive passive
animal 1 agressive 10, 10 5, 5
passive 5, 5 0, 0
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Some examples:
Matching pennies: Two children …rst select who will be represented
by "same" and who will be represented by "di¤erent." Then, each child
conceals in her palm a penny either with its face up or face down. Both
coins are revealed simultaneously. If they match (both are heads or both
are tails), the child "same" wins. If they are di¤erent (one heads and one
tails), "di¤erent" wins.
Player B(di¤erent)
Heads Tails
Player A Heads 1, 1 1, 1
(same) Tails 1, 1 1, 1
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A brief History
1838: Augustin Cournot’s Research gives an intuitive explanation of
what would eventually be formalized as the Nash equilibrium, as well
as provides an evolutionary, or dynamic notion of best-responding to
the actions of others
1944: The …eld of game theory came into being with the 1944 classic
Theory of Games and Economic Behavior by John von Neumann and
Oskar Morgenstern.
1950-53: In four papers between 1950 and 1953 John Nash made
seminal contributions to both non-cooperative game theory and to
bargaining theory.
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A brief History
1953: Lloyd Shapley in his paper A Value for N-Person Games
characterised, by a set of axioms, a solution concept that associates
with each coalitional game,v, a unique out-come, v. This solution in
now known as the Shapley Value.
1953: H. W. Kuhn’s paper, Extensive Games and the Problem of
Information includes the formulation of extensive form games which is
currently used, and also some basic theorems pertaining to this class
of games.
1965: Selten introduced the idea of re…nements of the Nash
equilibrium with the concept of (subgame) perfect equilibria.
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A brief History
1967-68: In a series of three papers, Games with Incomplete
Information Played by ’Bayesian’Players, Parts I, II and III, John
Harsanyi constructed the theory of games of incomplete information.
This laid the theoretical groundwork for information economics that
has become one of the major themes of economics and game theory.
1994: Nobel Prize in Economic Sciences was award to John Nash,
John C. Harsanyi and Reinhard Selten "for their pioneering analysis of
equilibria in the theory of non-cooperative games".
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