Eco 101, Games, page 1

Game Theory and Strategic Behavior

1. Games
a. Elements of a Game
1) Players = two or more firms, countries, etc.
2) Rules = possible strategies, order of play, etc.
3) Payoffs = (1, 2) = who gets what, depending on all players’ chosen
strategies

b. The Payoff Matrix = shows all three elements of a game

Reading a payoff matrix:
P2: “Turkey” P2: “Coffee maker”
P1: “Turkey” (5, 8) (3, 10)
P1: Coffee maker” (4, 9) (2, 6)

P1: Chooses a Row

P2: Chooses a Column
Find the payoffs if the players choose {C, T}:
Can P1 choose {T, T}?

c. Dominant Strategy – Gives higher payoff than other strategies, regardless of other
players’ strategies.

Does P1 have a dominant strategy?

Does P2 have a dominant strategy?

d. Nash Equilibrium: A combination of strategies, one for each player, such that each
player is doing as well as she can given the other players’ strategies.
 Eco 101, Games, page 2

2. The Prisoner’s Dilemma

Prisoner 2
C D
| | |
Prisoner 1 Confess | (-4, -4) | (0, -10) |
| | |
Don’t | (-10, 0) | (-1, -1) |

Questions:
Does P1 have a dominant strategy?
Does the PD game have a Nash equilibrium?

Application: situations where there are gains to cooperation but incentives to cheat.
Examples: Arms Control, Trade Wars, Oligopoly, Marriage, Discrimination

3. Economic Example: Oil Production

Players: Saudi Arabia and Russia
Strategies: H = high output, L = low output
Russia (P2)
H L
| | |
Saudi Arabia H | (0, 0) | (10, -12) |
(P1) | | |
L | (-12, 10) | (2, 2) |
 Eco 101, Games, page 3

4. Repeated Games:
Tit-for-tat Strategy for SA:

Equilibria:

Is cooperation an equilibrium? Suppose RU cooperates, what if SA …

Round Cooperates Defects Gain from Defection

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