ECON202 - Game Theory Definitions

Game

Any competition between players (firms) in which strategic

behaviour plays a major role.

Strategy

A battle plan that specifies the action that a player will make

conditional on the information available at each move and for any

possible contingency.

Payoffs

Players’ valuations of the outcome of the game, such as profits

for firms or utilities for individuals.

Strategic behavior

A set of actions a firm takes to increase profit, taking

into account the possible actions of other firms.

Common knowledge

A piece of information known by all players, and it

is known by all players to be known by all players, and it is known to be

known, and so forth.

Strategic interdependence

A player’s optimal strategy depends on the actions of

others.

Rules of the game

Regulations that determine the timing of players’ moves and

the actions that players can make at each move.

Complete information

The situation where the payoff function is common

knowledge among all players.

Perfect information

The situation where the player who is about to move knows

the full history of the play of the game to this point, and that information is

updated with each subsequent action.

Static game

Game in which each player acts only once and the players act

simultaneously (or, at least, each player acts without knowing rivals’ actions).

Dynamic game

Game in which players move either sequentially or repeatedly.

Normal form

A representation of a static game with complete information

specifying the players in the game, their possible strategies, and the payoff

function that identifies the players’ payoffs for each combination of strategies.

Dominant strategy

A strategy produces a higher payoff than

any other strategy the player can use for every possible

combination of its rivals’ strategies.

Prisoners’ dilemma

A game in which all players have

dominant strategies that result in profits (or other

payoffs) that are inferior to what they could achieve if

they used cooperative strategies.

Best response

The strategy that maximises a player’s

payoff given its beliefs about its rivals’ strategies.

Nash equilibrium

A set of strategies such that, when all

other players use these strategies, no player can obtain a

higher payoff by choosing a different strategy.

Pure strategy

Each player chooses an action with certainty.