Chapter 5: Game Theory and Market Forces

Vocabulary flashcards covering the fundamental concepts of game theory, including the Prisoner's Dilemma, Nash Equilibrium, and sequential game analysis.

Game theory

The theory that attempts to predict the outcome in situations of social interaction.

Strategic interaction

A situation in which each person, when taking an action, must realize that others will respond to his action.

Players

The economic agents involved in a game, such as $2$ duopolists.

Strategies

The possible actions or choices available to players in a game, such as production volumes or prices.

Payoff matrix

Also called a results matrix or game matrix, it characterizes the results of a game for each strategy combination.

Prisoner's Dilemma

A specific game between $2$ prisoners illustrating why cooperation is difficult to maintain even when it is mutually beneficial.

Dominant strategy

A strategy that is the best for a player regardless of the strategy chosen by the other players.

Equilibrium in dominant strategies

A combination of strategies where each player chooses their own dominant strategy.

Nash equilibrium

A combination of strategies where no player wishes to change their strategy, given the strategy of the other players.

Non-cooperative outcome

The expected outcome in a prisoner's dilemma where players pursue individual rationality rather than the socially desirable result.

Problem of coordination

A conflict where individual decisions are not coordinated to achieve a cooperative or socially desirable solution.

Pure strategy

A game strategy where the probabilities for each strategy are either $1$ or $0$.

Mixed strategy

A situation where a player chooses the odds with which each strategy is chosen.

Battle of the sexes

A coordination game where players prefer to coordinate their actions but have different preferences for which outcome is chosen.

Volunteer’s dilemma

A coordination game where individuals must decide whether to take an action (jump in the river) to save another, balancing personal cost against collective loss.

Simultaneous game

A game where players choose their strategy at the same time and do not know the strategy chosen by other players.

Sequential game

A game where players move in a certain order, allowing later players to know the chosen strategy of earlier players.

First mover advantage

The benefit gained by the player who chooses their strategy first in a sequential game.

Game tree

A visual tool used to solve sequential games, illustrating the sequence of moves and final nodes.

Backward induction

The procedure of solving sequential games by starting at the final nodes and looking for optimal choices to move further back to the initial node.

Tit for tat strategy

A repeated game strategy where a player chooses to work together in the first round and then imitates the opponent's previous choice in subsequent rounds.

Social norms

Implicit long-term agreements that individuals respect to achieve more efficient social outcomes, even if it is not in their immediate short-term interest.

Government intervention

The use of coercive power by the government to solve coordination problems that social norms fail to address spontaneously.