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• Ritesh Pandey

1. Strategic interaction among economic agents : Classical Analysis Game Theoretic analysis 2. Uses of Game theory: Parlor Games, Political Negotiation and Economic behavior.

3. Our focus will be on Two - Person games with a finite no. of strategies. 4. The Concept of a Payoff Matrix. 5. Dominant Strategy: If there is one optimal choice of strategy for a player irrespective of the other’s choice. 6. If a DS exists, it will be the equilibrium outcome of the game.

Player B Left Top Player A Bottom 2,1 1,0 1,2 Right 0,1

7. Usually, dominant strategy equilibria

are not that frequent. 8.But we can be less strict. 9. A Nash Equilibrium: Rather than require that A’s choice be optimal for all choices of B, we can just require that it be optimal only for optimal choices of B.

Player B Left Top Player A Bottom 0,0 1,2 2,1 Right 0,0

10. We say that a pair of strategies is a Nash equilibrium if A’s choice is optimal given B’s choice, and B’s choice is optimal given A’s choice.

11. Note that neither knows beforehand the other person’s choice 12. He only has a set of Expectations. 13. Problems with Nash equilibrium concept: 1. Non-unique Nash equilibria may exist. 2. No Nash equilibria may exist.

Player B Left Top Player A Bottom 1,0 -1,3 0,0 Right 0,-1

**No Nash Equilibria exist here.
**

(Pure Strategy)

14. Of course this was a pure-strategy case. 15. We can have a mixed strategy case where each player merely has a probability of playing a choice. For e.g., each could choose with a probability of 50% for either choice and land up with an expected payoff. 16. It can be shown that for games of the kind we are considering we can always have a Nash equilibrium.

Player B Confess Confess Player A Deny -6,0 -1,-1 -3,-3 Deny 0,-6

The Prisoner’s dilemma. ( also, arms control, cheating in a cartel )

Repeated Games:

You have a chance to punish for bad behavior. You have a chance to establish a reputation for co-operation and thereby encouraging the other player to do the same. Viable only when an infinite no. of rounds are allowed.

Sequential games:

One Player gets to choose first. Scenario changes entirely in terms of equilibria.

Player B Left Top Player A Bottom 0,0 2,1 1,9 Right 1,9

A,B Player B chooses Player A chooses Top Left L e f Right t Left Bottom Player B chooses 1,9

1,9

0,0

Right

2,1

A Game of Entry Deterrence Incumbent Chooses Entrant chooses Stay Out Entrant,Incumbent 1,9

Fight L e f Don’t t fight Fight

1,9

Enter Incumbent chooses

0,2

Don’t fight

2,1

Column Left Top Row Bottom 0,0 1,2 2,1 Right 0,0

Girl Action Action Boy Art 0,0 1,2 2,1 Art 0,0

The battle of the sexes

Player B Confess Confess Player A Deny -6,0 -1,-1 -3,-3 Deny 0,-6

The prisoner’s dilemma

USSR Refrain Refrain US Build 3,1 2,2 4,4 Build 1,3

An arms race

Boy2 Swerve Swerve Boy 1 Straight 1,-1 -2,-2 0,0 Straight -1,1

Chicken

Keeper Defend left Swerve Kick left Swerve Striker Boy 1 Kick right Straight 90,-90 1,-1 20,-20 -2,-2 50,-50 0,0 Defend right Straight 80,-80 -1,1

Penalty point in soccer

Games of co-existence Evolutionary Stable Strategy(ESS) Astonishingly, EESS equilibria are also Nash equilibria.

Dog 2 Hawk Hawk Dog 1 Dove 0,4 2,2 -2,-2 Dove 4,0

Hawk-Dove Game

Games of Commitment: Till now simultaneous moves. Now Sequential. In such Games, the important issue is commitment. Commitment must be IRREVERSIBLE & OBSERVABLE

Scorpion Chooses Frog chooses Carry

Sting L e f t Refrain

Frog,Scorpion -10,5

5,3

Refuse 0,0 The Frog & The Scorpion Story

Scorpion Chooses Frog chooses Carry

Sting L e f t Refrain

Frog,Scorpion -10,2

5,3

Refuse 0,0 The Smart Frog & The Scorpion

Hostage Chooses Kidnapper chooses Release

Identify L e f t Refrain

Kidnapper,Hostage -5,5

5,3

Kill -3,-10 The Kindly Kidnapper

Dominant Pig Don’t press lever Don’t press lever press lever 0,0 press lever 4,1

Subordinate Pig

0,5

2,3

When Strength is Weakness: Pigs Pressing Levers

Younger Generation Support Save Older Generation Squander 2,-1 -2,-2 3,-1 Refrain 1,0

Savings & Social Security

Young Choose Old choose Squander

Support L e f t Refrain Support

Old,Young -5,5

5,3

-3,-10

Save Young Choose Refrain The Savings Game:Extended Form 1,0

Kidnapper,Hostage Client Chooses Contractor chooses Extort Give in L e f Find a t painter 1300,0

0,-100

Charge actual cost The Hold-Up Problem

0,1300

the document is all about the use & decribing the GAME THEORY

the document is all about the use & decribing the GAME THEORY

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