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