Topic 5 Flashcards
(23 cards)
What is game theory?
A set of tools that economist, political scientists, military analysts and others use to analyse decision making by players who use strategies.
What is a game?
Any competition between players (firms) in which strategic behaviour plays a major role.
What is an action?
A move that a player makes at a specified stage of a game, such as how much output a firm produces in the current period.
What is a 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.
What are payoffs?
Players’ valuations of the game, such as profits for firms or utilities for individuals.
What is strategic behaviour?
A set of actions a player takes to increase his or her payoff, taking into account the possible actions of other players.
E.g. a firm may set an output level, act to discourage potential firms from entering the market, or choose to employ technology.
What are the 2 assumptions we maintain throughout our analysis of game theory?
- That players are interested in maximising their profits
2. All players have common knowledge
What is common knowledge?
- What all players know about the rules of the game
- That each player’s payoff depends on actions taken by all players
- That all players want to maximise their payoffs
- That all players know the payoffs and
- That their opponents are payoff maximising and so on.
What is strategic interdependence?
When a player’s optimal strategy depends on the actions of others.
What does a payoff function determine?
For each game, a payoff function determines any player’s payoffs given the combination of actins by all players.
What is complete information?
The situation where the payoff function is common knowledge among all players.
What is 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.
What is a static game?
A game in which each player acts only once and the players act once and the players act simultaneously (at; at least, each player acts without knowing his/her rivals’ actions).
- In these games, firms have complete information about the payoff functions but imperfect information about rivals moves.
What is a dynamic game?
A game in which players move either sequentially of repeatedly.
- Players have complete information about the payoff functions and, at each move, players have perfect information about the previous moves by all the players.
What are normal-form games?
This is 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.
How can we predict the outcome of some games?
By using the insight that rational players will avoid strategies that are dominated by other strategies. However, for many other games, this approach alone does not allow us to precisely predict the outcome.
How can we predict the outcome of a broader class of games?
Based on each player choosing a best response to the other players’ actions (the response that produces the largest payoff).
What is a dominant strategy?
A strategy that produces a higher payoff than any other strategy the player can use for every possible combination of its rivals’ strategies. Players do not always have dominant strategies.
What is the prisoners’ dilemma game?
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.
What happens when not all players have dominant strategies?
We cannot precisely identify the outcome of the game from what we know so far. Therefore, we must use iterated elimination of the strictly dominated strategies to predict what the firms will do (this does not always work)
What is the iterated elimination of strictly dominated strategies?
This involves finding the dominant strategy by eliminating inferior strategies. To rely on this approach, we have to assume that:
- The players possess common knowledge that they are payoff maximising
- The players know that other players are payoff maximising and
- Players know that all players know that the other players are payoff maximising.
What is the best response strategy?
The strategy that maximises a player’s payoff given its beliefs about its rivals’ strategies. This is used when iterative elimination of strictly dominated strategies fails to predict a unique outcome.
What is a 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.
- This is a stronger solution conception than the iterate elimination of strictly dominated strategies
