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Chapter 3
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Key Concepts:
Terms in this set (23)
Game Theory
A method of analyzing the strategic interaction that occurs between small numbers of people, firms, organizations, and even countries
Strategic interaction
Anticipating the decisions others will make in response to your decision
Mutual interdependence
The characteristic of games whereby the outcome of the game depends not only on what you do but what the other players do in response
Game Playing
Mutual interdependence, anticipate moves that others might be making, choose a strategy based on the move anticipated from a rival
Decision Making
Little of no mutual interdependence, is a process of committing to a course of action, requires evaluating competing alternatives but not outwitting a rival, in some instances a game theory can be used to make decisions
Economic Model
A structured and simplified version or reality used to explain real-world behavior
Elements of the Game
Player: a rational entity with preferences
Strategy: a predetermined set of actions to take in response to other player's actions
Information: amount of knowledge about the strategy and actions of a game
Preferences: Desired outcomes of a game by a player
Outcomes: the potential results of a game
Payoff: the utility received from an outcome
Equilibrium: the solution to a game
Payoff Matrix
the organizational tool, a table with numbers that summarizes who the players are, the actions available to each player, the payoffs available to each player for each action that he or she might choose given the action chosen by their rival
Nash Equilibri
An outcome where both players are playing their best strategy, given the strategy chosen by the opponent
Prisoner's Dilemma
A game in which each player has a dominant strategy of defecting, and each ends up worse off than if they had both cooperated.
- Each play has 2 strategies: cooperate or defect
- Defecting is a dominant strategy for each player
- There is a single Nash Equilibrium at (defect, defect)
- The Nash Equilibrium is worse for each individual and for the group than the cooperative solution (cooperate, cooperate)
Pure Coordination
Where it only matters that the players coordinate on an outcome, not on which outcome they coordinate.
Characteristics of Pure Coordination
- Neither player has a common strategy
- There are 2 general outcomes: the players either coordinate with one another or fail to coordinate
- Nash Equilibria exist at every outcome where the players coordinate
- The playoff for coordinating is higher than the payoff for not coordinating
- Each of the Nash equilibria offers identical payoffs to any particular player
Best Response analysis
- A technique for locating equilibria by marking the best strategy a player can use to counter each of his/her rival's possible moves
- simple if-then statements
- both players are playing their best response to the play for the other
- Odds can be improved if the game has a focal (Schelling) point
Schelling Point
A commonly help piece of knowledge culture, or convention that helps people successful coordinate their actions.
Assurance
A game in which players want to coordinate on an outcome and in which both agree that coordinate on an outcome and in which both agree that coordinating on one particular outcome is preferred to coordinating on the other.
- The same Nash equilibrium is preferred by all players
- Players need assurance that the others will choose the preferred alternative
Characteristics of Assurance Games
- Neither player has dominant strategy
- 2 general outcomes: the players either coordinate with one another of fail
- The playoff for coordinating is higher than the payoff for not coordinating
- Nash equilibria exist at every outcome where the players coordinate
Battle of the sexes
A game in which both players want to coordinate, but each player prefers coordinating on a different outcome. The objective is to manipulate the other player into choosing your preferred Nash equilibrium.
Tough Strategy
A strategy the pursues the player's preferred Nash equilibrium.
Weak Strategy
A strategy that leads to a non-preferred Nah equilibrium.
Characteristics: Battle of the sexes
- Neither player has a dominant strategy
- There are 2 general outcomes: The players either coordinate with another or fail
- Nash equilibrium exist at every outcome where the players coordinate
- The playoff for coordinating is higher than the payoff for not coordinating
- Each player has a tough strategy and a weak strategy and these strategies differ for each player
- Each player prefers a different Nash equilibrium:
1. For a particular player, the Nash equilibrium corresponding to that player's tough strategy is preferred to the Nash equilibrium corresponding to that player's weak strategy
2. If both play their tough strategy, they will fail to coordinate
Game of Chicken
A version of battle of the sexes game that results in disaster if each player plays his or her tough strategy.
Characteristics: Game of Chicken
- Neither player has a dominate strategy
- Each player has a tough strategy and a weak strategy
- There are two general outcomes:
1. The players either coordinate with one another or fail
2. Coordination occurs when one player plays a tough, and the other plays a weak strategy
- Nash equilibrium exist at every outcome where the players successfully coordinate
- Each player prefers a different Nash equilibrium
- When both players play their tough strategy, both experience a disastrous outcome (represented by the worst possible payout in a game
Differences
Battle of sexes- the outcome is a simple failure to coordinate
Chicken- disaster results (worst possible outcome for all parties)
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