GAME THEORY

Asst. Prof. Esra BAYTÖREN, PhD.

The Aim of the Course
It is aimed that students will be able to use game theory in
business applications, develop game theory models of
different business and management problems, and apply
solution concepts used in game theory.
Course Topics
Learning Outcomes
Lecture Notes
It will be shared regularly in “Mebis - my course files”.
REFERENCES
OTHER REFERENCES
1. Hakan Karabacak, Yeni Başlayanlar İçin Oyun Teorisi, 2.baskı, Seçkin,
2018
2. Ensar Yılmaz, Oyun Teorisi, 3.Baskı, Literatür, 2016
3. Hakan Karabacak, Strateji Oyunları, Optimist, 2017
4. A.M. Brandenburger, B.J.Nalebuff, Oyun Teorisi ve Ortaklaşa
Rekabet, Scala, 2015
5. A.K.Dixit, B.J.Nalebuff, Stratejik Düşünme, Sabancı Üniversitesi, 2015
6. İ.K.Geçkil, P.L.Anderson, Applied Game Theory and Strategic
Behavior, 2010
7. G.Owen, Game Theory, 4th edition, 2013
EXAMS
• Midterm Exam : %40
• Final Exam : %60
• Resit Exam : %60

• In order to be successful in the course, at least 50 points must be

obtained from the general exam.

• In addition, the average score of the course must be at least 60 points.

 2 nd Week

Key Ideas and Examples,

Terminology, Assumptions and
Classification of Games
Game Theory
• It was invented in the last century by mathematicians and economists
as a tool to analyse both economic competition and political conflicts.

• The fundamental insight of game theory was to apply the logic of

games to events in real life.

• Most games played for entertainment involve two persons (or two
teams) competing directly against each other. For example, chess and
football etc..
Game Theory
• Originally, theorists focused on strictly competitive or two-person
zero-sum games.

• In these games, cooperation is pointless since the goals of the players

are necessarily at odds; if one player prefers a certain outcome, the
other player will not prefer it.

• The setting for the game is typically a one-time competition, in which

the actions of players in the past do not affect the current
competition at all.
Game Theory
• This construction of a game works quite well in many game situations
and is a powerful tool for the development of much of modern game
theory.

• However, it is unsatisfactory as a model for the majority of economic,

business, or political applications.

• In real life, there are usually more than two parties involved in a
market, and the contest or opportunity to execute some type of
strategic decision happens repeatedly.
Key Conceptual Developments in Early Years
• The extensive (or tree) form of a game, introduced by John Von
Neumann in 1928
• The definitions of a strategy, strategic behavior, and strategic actions
of a player in a game
• The normal form (or matrix form) of a game
• The concept of mixed or randomized strategy
• The concept of individual rationality
• Different types of information concepts, such as perfect information
• The mini-max theorem
Pioneers of Game Theory and Advancement of the Field

• In 1944, John Von Neumann and Oskar Morgenstern published the

Theory of Games and Economic Behavior. It established the economic
and mathematical basis for the field we now call “game theory.”

• During the 1950s, game theory developed dramatically, when John

Nash developed game theory tools and concepts for general non-
cooperative theory and cooperative bargaining theory.
Pioneers of Game Theory and Advancement of the Field

John Nash
Pioneers of Game Theory and Advancement of the Field

• In 1950, Strategy in Poker, Business and War by John McDonald was

published.

• Game theory continued to expand. In the 1970s it was even applied

to biology by John Maynard Smith in his work on evolutionary stable
strategy (ESS).
Recognition of Game Theory

• Game theory has been appreciated by academicians, and rewarded

by universities and other academic institutions, particularly in the
field of economics.
• Other economists who have greatly contributed to the field have also
won the Nobel Prize in recent years. In 2002, behavioral and
experimental economist Vernon Smith was awarded the Nobel Prize
in Economics
• In 2007, three economists, Roger Myerson, Leonid Hurwicz, and Eric
Maskin, were awarded the Nobel Prize in Economics
Game Theory, Strategy, and Strategic Behavior

• A game-theoretic model is an environment where each decision-

maker’s actions interact with those of others.

üBehavior that involves such interactive decision-making is called

strategic, …

üand the set of actions and moves by each player with respect to
others, given the rules of the game, is called strategy.
Game-Theoretic Models and Illustration
• The interdependence of the players’ decisions is the foundation of game
theory.
• Every action has a reaction.
• These interactions arise in two ways: sequential (sıralı) and simultaneous
(eşzamanlı).
• Sequential interaction refers to each player taking action in a sequence of turns.
During a player’s turn, he or she is aware of the actions taken in previous turns.
Furthermore, each is aware that his current action(s) will affect later actions of the
other player(s), as well as his future action(s) during the game.
• The second kind of interaction is simultaneous. Simultaneous interactions occur
when players take actions concurrently, in ignorance of the others’ current actions. It
is important to note that while players do not know the specific actions of the other
players, they are aware of each other in simultaneous games.
The Payoff Matrix and Tree Diagram
The Payoff Matrix and Tree Diagram
Key Concepts

• Players
• Information: We have 3 main categories for the information structure
of a game
üPerfect vs. imperfect information,
üComplete vs. incomplete information, and
üSymmetric vs. asymmetric information
• Actions or Strategies
• Payoffs