Game Theory and Strategic Choices – Chapter 18

40 vocabulary flashcards covering all major concepts from Chapter 18 on game theory, including strategic thinking steps, Prisoner’s Dilemma, coordination problems, first- and second-mover advantages, and repeated-game strategies.

Game Theory

The study of strategic decision-making in situations where the outcome depends on the choices of multiple players.

Strategic Interaction

A setting in which each player’s best choice depends on the choices of others and vice versa.

Interdependence Principle

The idea that your decisions and payoffs are intertwined with those of other people.

Four-Step Recipe (for Strategic Decisions)

1) Consider all possible outcomes; 2) Think about the “what-ifs” separately; 3) Evaluate your best response; 4) Put yourself in someone else’s shoes.

Payoff Table

A grid listing each player’s options, the combinations of choices, and the resulting payoffs in every cell.

Best Response

The choice that yields the highest payoff for a player, given the other player’s action.

Nash Equilibrium

A situation in which every player is making a best response to the choices of others; no one can gain by unilaterally deviating.

Dominant Strategy

An action that is a player’s best response regardless of what the other player does.

Prisoner’s Dilemma

A game in which individually rational strategies lead to a collectively worse outcome because each player has an incentive to defect.

Failure of Cooperation

The outcome in a Prisoner’s Dilemma where players choose to defect even though mutual cooperation would make them better off.

Socially Optimal Outcome

The set of choices that maximizes joint economic surplus for all players (often different from equilibrium).

Collusion

An agreement among competitors to avoid competing (e.g., by charging the same high price).

Coordination Game

A game where players benefit from making the same (complementary) choices; multiple equilibria often exist.

Battle of the Sexes

A coordination problem where two players prefer being together but have different favorite options (e.g., match vs. ballet).

Anti-coordination Game

A game in which players want to take different actions from one another (e.g., choosing different driving routes).

Multiple Equilibria

The presence of more than one Nash equilibrium, making coordination on a single outcome difficult.

Focal Point

An external cue (cultural norm, convention, salient option) that helps players coordinate on a particular equilibrium.

First-Mover Advantage

A benefit gained by committing to an action before rivals, forcing them to respond less aggressively.

Second-Mover Advantage

A benefit gained by acting after observing a rival’s move, allowing flexibility to adapt.

Sequential Game

A strategic interaction in which players make moves one after another rather than simultaneously.

Game Tree

A diagram showing the order of moves, available actions, and resulting payoffs in a sequential game.

Look Forward, Reason Backward

Analyzing a sequential game by starting at the final decisions and working backward to determine earlier optimal choices.

Credible Commitment

A believable pledge to carry out a strategy, often requiring irreversible actions to signal sincerity.

One-Shot Game

A strategic interaction that occurs only once, with no future repercussions.

Repeated Game

A game in which the same players face the same strategic situation in multiple periods.

Finitely Repeated Game

A repeated game with a known final period; typically unravels to one-shot behavior through backward induction.

Indefinitely Repeated Game

A repeated game with no known end point, allowing the possibility of sustained cooperation.

Grim Trigger Strategy

A strategy of cooperating until an opponent defects, after which you defect forever as punishment.

Punishment (in Repeated Games)

Threatened future actions that make deviation from cooperation unprofitable today.

Joint Economic Surplus

The combined gains to all players from a given set of choices.

Simultaneous Game

A game where players choose actions without knowledge of the others’ choices (e.g., rock-paper-scissors).

Temptation to Defect

The incentive to pursue individual gain even when it reduces joint payoffs, central to the Prisoner’s Dilemma.

Coordination Failure

An outcome where players end up in a worse equilibrium or out-of-equilibrium outcome because they couldn’t align choices.

Boom Economy Equilibrium

A good equilibrium where firms hire and workers spend, reinforcing high economic activity.

Bust Economy Equilibrium

A bad equilibrium where low hiring leads to low spending, reinforcing economic downturn.

Communication (as a Solution)

Direct discussion that helps players coordinate when interests are aligned.

Culture and Norms

Shared beliefs and conventions that guide players toward specific equilibria and facilitate coordination.

Laws and Regulations

Formal rules imposed to enforce coordination on desirable equilibria (e.g., driving on the right side).

Strategic Plan

A detailed set of contingent actions specifying how a player will respond in every possible game situation.

Under-cutting

A strategy of lowering price below a rival’s collusive price, gaining short-term profit at the expense of long-term cooperation.

Economic Surplus

The total benefits minus total costs accruing to all participants in a market or game.