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Mason. Game Theory

Mason. Game Theory

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Published by: matsehar on Feb 24, 2012
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Game Theory
1Robin MasonMarch 2, 2006
1
These notes are based on to a large extent on the notes of Dirk Bergemannand Juuso Valimaki for similar courses at Yale University and the Helsinki Schoolof Economics. I am grateful to them both for the permission to use and edit thosenotes.
 
Contents
1 Game Theory: An Introduction 4
1.1 Game Theory and Parlour Games—a Brief History . . . . . . 51.2 Basic Elements of Noncooperative Games . . . . . . . . . . . . 6
2 Normal Form Games 7
2.1 Pure Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . 72.2 Dominance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82.3 Nash equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . 122.3.1 Finite Normal Form Game . . . . . . . . . . . . . . . . 132.3.2 Cournot Oligopoly . . . . . . . . . . . . . . . . . . . . 142.3.3 Auctions with perfect information . . . . . . . . . . . . 152.4 Mixed Strategies . . . . . . . . . . . . . . . . . . . . . . . . . 152.4.1 Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . 162.4.2 Construction of a mixed strategy Nash equilibrium . . 202.4.3 Interpretation of mixed strategy equilibria . . . . . . . 232.5 Mixed Strategies with a Continuum of Pure Strategies . . . . 232.5.1 All pay auction . . . . . . . . . . . . . . . . . . . . . . 232.5.2 War of attrition . . . . . . . . . . . . . . . . . . . . . . 292.5.3 Appendix: Basic probability theory . . . . . . . . . . . 302.6 Appendix: Dominance Solvability and Rationalizability . . . . 332.6.1 Rationalizable Strategies . . . . . . . . . . . . . . . . . 352.7 Appendix: Existence of Mixed Strategy Equilibria . . . . . . . 36
3 Extensive Form Games 38
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383.2 Definitions for Extensive Form Games . . . . . . . . . . . . . 403.2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . 403.2.2 Graph and Tree . . . . . . . . . . . . . . . . . . . . . . 401
 
CONTENTS 
23.2.3 Game Tree . . . . . . . . . . . . . . . . . . . . . . . . . 403.2.4 Notion of Strategy . . . . . . . . . . . . . . . . . . . . 433.3 Subgame Perfect Equilibrium . . . . . . . . . . . . . . . . . . 463.3.1 Finite Extensive Form Game: Bank-Run . . . . . . . . 473.4 The Limits of Backward Induction: Additional Material . . . . 483.5 Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4 Repeated Games 51
4.1 Finitely Repeated Games . . . . . . . . . . . . . . . . . . . . . 514.2 Innitely Repeated Games . . . . . . . . . . . . . . . . . . . . 544.2.1 The prisoners dilemma . . . . . . . . . . . . . . . . . . 544.3 Collusion among duopolists . . . . . . . . . . . . . . . . . . . 554.3.1 Static Game . . . . . . . . . . . . . . . . . . . . . . . . 554.3.2 Best Response . . . . . . . . . . . . . . . . . . . . . . . 564.3.3 Collusion with trigger strategies . . . . . . . . . . . . . 574.3.4 Collusion with two phase strategies . . . . . . . . . . . 58
5 Sequential Bargaining 60
5.1 Bargaining with Complete Information . . . . . . . . . . . . . 615.1.1 Extending the Basic Model . . . . . . . . . . . . . . . . 655.2 Dynamic Programming . . . . . . . . . . . . . . . . . . . . . . 655.2.1 Additional Material: Capital Accumulation . . . . . . . 68
6 Games of Incomplete Information 70
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706.1.1 Example . . . . . . . . . . . . . . . . . . . . . . . . . . 706.2 Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 716.2.1 Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . 716.2.2 Belief . . . . . . . . . . . . . . . . . . . . . . . . . . . . 726.2.3 Payos . . . . . . . . . . . . . . . . . . . . . . . . . . . 726.3 Bayesian Game . . . . . . . . . . . . . . . . . . . . . . . . . . 726.3.1 Bayesian Nash Equilibrium . . . . . . . . . . . . . . . 736.4 A Game of Incomplete Information: First Price Auction . . . 746.5 Conditional Probability and Conditional Expectation . . . . . 756.5.1 Discrete probabilities - finite events . . . . . . . . . . . 766.5.2 Densities - continuum of events . . . . . . . . . . . . . 786.6 Double Auction . . . . . . . . . . . . . . . . . . . . . . . . . . 806.6.1 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

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