Game Theory

A set of tools that economists, political scientists,

military analysts and others use to analyze decision
making by players who use strategies.
Game theory formally describes games and predicts
their outcome conditional on the rules of the game,
the information that players have, andother factors.
Cont…
Static Games:
 A static game is played once by players who act
simultaneously and hence do not know how other
players will act at the time they must make a decision.
Dynamic Games:
In a dynamic game, players may have perfect
information about previous moves but imperfect
information about current moves if players act
simultaneously within each period.
Cont…
Auctions:
An auction is a game where bidders have incomplete
information about the value that other bidders place
on the auctioned good or service.
strategic behavior:
A set of actions a firm takes to increase profit, taking
into account the possible actions of other firms.
Cont…
Strategic interdependence:
A player’s optimal strategy depends on the actions of
others.
Rules of the game
Regulations that determine the timing of players
moves and the actions that players can make at each
move.
Complete information:
The situation where the payoff function is common
knowledge among all players.
Cont…
Perfect information:
The situation where the player who is about to move knows
the full history of the play of the game to this point, and
that information is updated with each subsequent action.
Static game:
A game in which each player acts only once and the players
act simultaneously (or, at least, each player acts without
knowing rivals’ actions).
Pure strategy:
Each player chooses any action with certainty.
Cont…
Dominant strategy:
A strategy that produces a higher payoff than any other
strategy the player can use for every possible combination of
its rivals’ strategies.
Nash equilibrium:
A set of strategies such that, when all other players use these
strategies, no player can obtain a higher payoff by choosing a
different strategy.
Mixed strategy:
A firm (player) chooses among possible actions according to
probabilities it assigns.