Topic 6 Prerecorded Video Slides

The basics of game theory

Game Theory

a tool used by economists to study the strategic interaction of a small number of “players”

• Anyone making decisions can be modeled with game theory

Players

• these are the decision makers within the game

• usually within firms, governments, or interest groups

Strategies

• these are the decision choices

ex: price, product, advertising, campaigning, regulation

Payoffs

• these are the outcomes of the decision choices 

• usually in terms of profits and losses 

• maximize their payoffs as the goal in this class 

Dominant Strategy

a strategy that results in the highest payoff for a player regardless of what strategy their rival plays

Secure Strategy

In the absence of a dominant strategy, play the strategy that guarantees the highest payoff given the worst payoff

Think like your rivals

In the absence of a dominant strategy, look at the game from your rival’s perspective 

Nash Equilibrium

A condition describing a set of strategies in which no player can improve their payoff by unilaterally changing their strategy, given the rival’s strategy

• No one has regrets

Normal Form Game

A representation of a game that reveals the players, their possible strategies, and the resulting payoffs

• Simultaneous move one-shot games

• ex: rock, paper, scissors

Player One controls 

rows 

Player Two controls

columns 

Checking for secure strategies

Each player examines the worst payoff that could arise from each action and chooses the action that has the highest of the worst payoffs

• Avoid the lowest payoff 

Extensive Form Game

A representation of a game that summarizes the players, the available information, the available strategies, the resulting payoffs, and the sequence of moves

Subgame Perfect Equilibrium

A set of strategies that allows no player to improve his own payoff at any stage of the game by changing strategy

• Work backward from your rival’s strategy