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Lecture 1 PDF
Lecture 1 PDF
Abdul Quadir
XLRI
December 7, 2019
What is Game Theory?
I Driving
I Coordination
I Penalty kicks
I hunter and hunted
I Grade trap
I prisoner’s dilemma
I Group project
I free-riding
I Mean professor
I commitment
I Dating
I hidden information
Common Games Played by Businesses
I Standards adoption
I Coordination
I Audits
I hunter and hunted
I Price wars
I prisoner’s dilemma
I Pollution abatement
I free-riding
I Capacity expansion
I commitment
I External financing
I hidden information
I Spectrum allocation
I Auctions
Origins of Game Theory
Pair
α β
α B, B A, C
Me
β C, A B+, B+
Outline of The Course
Module A: Games of Complete Information and Its Business
Applications
I Introduction to game theory - Concept of individual rationality,
decision making with certain and uncertain outcomes.
I Sequential move games, backward induction and foresight.
I Simultaneous move games - Domination, iterated elimination
of dominated strategy, Pure strategy Nash equilibrium.
I Repeated Games.
I Simultaneous move games - Mixed strategy Nash equilibrium
I Applications of Nash Equilibrium - Auctions, Buyer-seller
games, Market competition, Electoral competition.
I Commitment and Strategic moves - Credibility, threats and
promises.
I Bargaining under complete information.
Outline of The Course
b
2
c
Decision Maker a
d 3
4
Decision Tree
I decision trees are very handy to represent and solve decision
problems.
I Suppose you would like to choose the best outcome from
X = {a, b, c, d}.
I Preferences are given as d a c b.
I We can consider the following payoff representation of the
preferences as v (d) = 4, v (a) = 3, v (c) = 2 and v (b) = 1.
I This could be depicted in the following decision tree:
1
b
2
c
Decision Maker a
d 3
4
Rational Player
I We require that a decision must know the following features
of the problems:
1. A, all possible actions
2. X , all possible outcomes
3. exactly how each action affects which outcome will materialize
4. his rational preferences (payoffs) over outcomes.
I In many problems, actions and outcomes are equivalent.
I However, there are some problems they are not.
I For instance, you can either let your drunk friend derive or call
a taxi.
I The outcomes are accident or he is safe reaching home.
I But we can define a one-to-one correspondence between
action and outcome.
I Thus, we can write v (a) = u(x(a)).
I A decision maker is rational if he chooses an action a ∈ A
that maximizes his payoff. Technically, a∗ is chosen iff
v (a∗ ) ≥ v (a) for all a ∈ A.
Rational Player
I We require that a decision must know the following features
of the problems:
1. A, all possible actions
2. X , all possible outcomes
3. exactly how each action affects which outcome will materialize
4. his rational preferences (payoffs) over outcomes.
I In many problems, actions and outcomes are equivalent.
I However, there are some problems they are not.
I For instance, you can either let your drunk friend derive or call
a taxi.
I The outcomes are accident or he is safe reaching home.
I But we can define a one-to-one correspondence between
action and outcome.
I Thus, we can write v (a) = u(x(a)).
I A decision maker is rational if he chooses an action a ∈ A
that maximizes his payoff. Technically, a∗ is chosen iff
v (a∗ ) ≥ v (a) for all a ∈ A.
An Example
I Suppose you are in a party and considering in engaging in
social drinking.
I Suppose you would prefer some wine but too much will make
you sick.
I There is one litre-bottle wine.
I Thus, A = [0, 1] and a ∈ A is how much you choose to drink.
I Assume your payoff function over actions is represented by the
following function
v (a) = 2a − 4a2
I How much should you drink?
I The maximization problem is
max 2a − 4a2
a∈[0,1]
I Thus, a∗ = 0.25.
An Example
I Suppose you are in a party and considering in engaging in
social drinking.
I Suppose you would prefer some wine but too much will make
you sick.
I There is one litre-bottle wine.
I Thus, A = [0, 1] and a ∈ A is how much you choose to drink.
I Assume your payoff function over actions is represented by the
following function
v (a) = 2a − 4a2
I How much should you drink?
I The maximization problem is
max 2a − 4a2
a∈[0,1]
I Thus, a∗ = 0.25.
An Example
I Suppose you are in a party and considering in engaging in
social drinking.
I Suppose you would prefer some wine but too much will make
you sick.
I There is one litre-bottle wine.
I Thus, A = [0, 1] and a ∈ A is how much you choose to drink.
I Assume your payoff function over actions is represented by the
following function
v (a) = 2a − 4a2
I How much should you drink?
I The maximization problem is
max 2a − 4a2
a∈[0,1]
I Thus, a∗ = 0.25.
An Example
I Suppose you are in a party and considering in engaging in
social drinking.
I Suppose you would prefer some wine but too much will make
you sick.
I There is one litre-bottle wine.
I Thus, A = [0, 1] and a ∈ A is how much you choose to drink.
I Assume your payoff function over actions is represented by the
following function
v (a) = 2a − 4a2
I How much should you drink?
I The maximization problem is
max 2a − 4a2
a∈[0,1]
I Thus, a∗ = 0.25.
An Example
I Suppose you are in a party and considering in engaging in
social drinking.
I Suppose you would prefer some wine but too much will make
you sick.
I There is one litre-bottle wine.
I Thus, A = [0, 1] and a ∈ A is how much you choose to drink.
I Assume your payoff function over actions is represented by the
following function
v (a) = 2a − 4a2
I How much should you drink?
I The maximization problem is
max 2a − 4a2
a∈[0,1]
I Thus, a∗ = 0.25.
More Realistic Problem