Game Theory
Issues
Humans are not rational
Utilities always may not known
Other assumptions made by Game theory model may not hold
Key Concepts
Cooperative outcome
An equilibrium where the players agree to cooperate
Dominant Strategy
A dominant strategy is one where a single strategy is best for a player regardless of what strategy other players in the game decide to use.
Nash Equilibrium
Any situation where all participants in a game are pursuing their best possible strategy given the strategy of all the other participants
Tacit Collusion
Where firms undertake actions that are likely to minimize a competitive response.
Whistle Blowing
When one or more agents in a collusive agreement report it to the authorities.
Zero sum game
An economic transaction in which whatever is gained by one party must be lost by the other.
Introduction
Game theory studies settings where multiple parties (agents)
each have
– different preferences (utility functions),
– different actions that they can take
Each agent’s utility (potentially) depends on all agents’
actions
– What is optimal for one agent depends on what other agents do
• Very circular
Game theory studies how agents can rationally form beliefs
over what other agents will do, and (hence) how agents
should act