Application of Game theory
By Group 3
Table of content
Game and game theory Types of Game theory
Economic application of game theory
Game and Game theory
What is Game?
A game is a formal description of a strategic situation.
What is Game theory
Game theory is the formal study of decision-making where several players must make choices that potentially affect the interests of the other players.
Types of Game theory
Co-operative vs. Non-co-operative Zero-sum vs. Non-zero-sum Symmetrical vs. Asymmetrical Simultaneous vs. Sequential One-shot vs. Repeated
Co-operative versus Non-co-operative
In game theory, a cooperative game is a game where groups of players may enforce cooperative behaviour, hence the game is a competition between coalitions of players, rather than between individual players.
Example: Land owners and workers
In game theory, a non-cooperative game is one in which players make decisions independently.
Example: Cournot Duopoly model
Zero-sum game And Non Zero-sum game
A zero-sum game is a mathematical representation of a situation in which a participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s).
Example: Zero sum game
A nonzero sum describes a situation in which the interacting parties'
aggregate gains and losses are either less than or more than zero
Example: Trade
X A X Y 2,-2 -3,3
B
Y 3,-3 0,0
Symmetrical vs. Asymmetrical
A symmetric game is a game where the payoffs for playing a particular strategy depend only on the other strategies employed, not on who is playing them
Example: Battle of sexes
A asymmetric game is a game where the payoffs for playing a particular strategy depend on the other strategies employed by both the parties
Example: Trade
Movie Husband Movie Cricket 2,1 0,0 Wife Cricket 0,0 1,2
Simultaneous vs. sequential game theory
A simultaneous game is one in which the players effectively make their decisions at the same time
example: rock, paper, scissor
A sequential game is one in which the players take alternate turns to make their choices
example: chess
Prisoners Dilemma
Two suspects arrested for a crime. Prisoners decide whether to confess or not to confess
If both confess, both sentenced to 3 months of jail
If both do not confess, then both will be sentenced to 1 month of jail
If one confesses and the other does not, then the confessor gets freed (0 months of jail) and the non-confessor sentenced to 9 months of jail
What should each prisoner do?
1
Confess Confess 2 Not confess 0,9 1,1 3,3 Not confess 9,0
1 Confess Confess 2 3,3 Not confess 9,0
Not confess
0,9
1,1
One-shot versus Repeated
In a one-shot game, the stakes are high but carry no further repercussions
Example: Tipping a waiter on vacation
A repeated game (super game or iterated game) is an extensive form game which consists in some number of repetitions of some base game
Example: Passing a bill in Parliament
Economic applications of game theory
The study of oligopolies (industries containing only a few firms) The study of cartels, e.g., OPEC The study of military strategies Bargaining Auctions
The study of oligopolies
The game is based on two premises Each player has an incentive to choose an action that benefits itself at the other players expense When both players act this way, both are worse of than if they had chosen different action
Player A High Production Low Production (40 gallons) (30 gallons) High Production Player B Low Production 1600,1600 2000,1500 1500,2000 1800,1800
The study of cartels
A cartel is a formal (explicit) "agreement" among competing firms OPEC (Open Petroleum Exporting Countries) Case of Iran and Iraq Co-operate with cartel agreement Cheating on the agreement
Iran Co-operate Iraq Cheat
Co-operate
Cheat
2,2
1,3
3,1
1,1
The study of Military
Arms Race - Example of possible actions that might have been taken by U.S. and U.S.S.R
U.S. Arm Arm USSR At risk, At risk Disarm Risk & weak, safe and powerful Safe, Safe
Disarm
Safe & powerful, risk & weak
Bargaining
Co-operative bargaining
The outcomes of negotiations are more equally beneficial to all members of the household
Non co-operative bargaining
Personal interests motivate individuals within the household rather than the desire to work in a collaborative manner and maximize the benefit of all household members
Bargaining Power
The relative capacity of each of the parties to a negotiation or dispute to compel or secure agreements on its own terms
Bargaining problem terminologies
Feasible set
Disagreement point
Equilibrium Analysis x: demand from player A y: demand from player B
d: disagreement point (often d = 0)
Nash equilibrium
A set of strategies such that each is best for each player, given that the others are playing their own equilibrium strategies Nash product = (u(x) u(d))*(v(y) v(d))
u(d) & v(d) : the utility obtained if one decides not to bargain with the other player
Player Go B Stop
Player A Go Stop -5,-5 1,0 0,1 -1,-1
Two person bargaining game
F : Set of feasible pay offs
v1,v2 : Disagreement payoffs for player 1 and player 2 x1,x2 : Payoff of bargaining solution for player 1 and 2
, 1 1 2 2
Bargaining solution
Improved disagreement point
Improved disagreement point
Auctions
Games of incomplete information
First Price Sealed Bid Auction
Buyers simultaneously submit their bids Buyers valuations of the good unknown to each other Highest Bidder wins and gets the good at the amount he bid
Second Price Sealed Bid Auction
Same rules Exception Winner pays the second highest bid and gets the good
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Second-price auction
Suppose you value an item at 100, you should bid 100 for the item
If you bid 90
Someone bids more than 100: you lose anyway Someone bids less than 90: you win anyway and pay second-price Someone bids 95: you lose; you could have won by paying 95
If you bid 110
Someone bids more than 11o: you lose anyway Someone bids less than 100: you win anyway and pay second-price Someone bids 105: you win; but you pay 105, i.e., 5 more than what you value
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