Corporative game theory:
- Mathematical part of game theory: Is as is people were playing a
bargaining game:
- How to divide the available pie
Non Corporative game theory:
How people behave in strategic situations:
Formulate a game that corresponds to the economic stories
Simplify situations in order to understand them
Apply the appropriate equilibrium concept
What the equilibrium concept means for the
Is it a meaningful model or not?
Be critical of the predictions of a model
- Small branch of mathematics
- ASSUMPTION: PEOPLE MAKE RATIONAL DECISIONS
Rational Choice: Action chosen by a decision maker is at least
good, according to her preferences, as every other available action
1ST WEEK: Simple game
- People decide once
- They decide simultaneously
- They know the preferences of other players (hedoic assumption)
For each player
- Profile: Vector: All possible combinations of actions: Which is the
preferenc of player?
- Ordinal Preferences: How options are ranked
As long as an option is better than the other then we do not care
how much
- Monotonic transformation assumption:
If I square each of the numbers, we get the same thing so it is Not
really a problem: Same game
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PRISIONER’S DILEMMA
When is a game a Prisoner’s Dilemma?
Best Outcome: When one Player Finks but the other quiet
2nd Best Outcome: Both Quiet (Optimal Coordinated Outcome)
3rd best outcome: Both Fink
But this is better>>> than Me being Quiet and the other one Fink
BATTLE OF SEXES
Player 1: Wants to go to Bach
Both Bach (BEST FOR PLAYER 1)
Both Stravinsky
Player 2: Wants to go to Stravinsky.
Both Stravinsky (BEST FOR PLAYER 2)
Both Bach
STAG OR HARE
2 hunters deciding whether to hunt Stag or Hare
NOT A PRISIONER’S DILEMMA, because if the other player chooses
Stag, then you will prefer Stag as well (You would both obtain your best
possible outcomes)
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NASH EQUILIBRIUM:
Action Profile (One action for each player), in which no player wants to
deviate given the action every other player has chosen
No incentive to deviate given the action of the other player
2 components:
- Every player makes a rational choice given beliefs about other
players
- Player’s are able to anticipate the action of the other player
Steady state: If you have 2 player game
One population de fila player
One population of column player, Another of row players
One person is at random drawn, play the game, and then pout back in
population
- Everybody sees the behavior in previous encounters
A norm arises about how to play a game Forecast the behavior of
the other player
FORMAL
- Strategic Game with Ordinal Preferences
- Action profile: A*: 1 action for every player (vector)
When NASH EQUILIBRIUM?
For every player i and every action ai of player i
a* is at least as good as the action profile (ai, a*-i)
Keep choices of other players fixed, does player A wants to
unilaterally deviate?
No!....
If he keeps his part in NASH EQUILIBRIUM: Get at least as much
utility as if he’d unilaterally deviate
Ask the question for everyone separately…If no one wants to
deviate: NASH EQUOLIBRIUM
- Best Response:
Set of player i’s best actions Bi(ai),
(ai): list of the other player’s actions is ai (Conditional)
Some Examples
- Prisoner’s Dilemma
Nash equilibrium of Prisioner’s Dilemma: (FINK, FINK)
Cooperation: Better Outcome: (QUIET, QUIET)
- Stag Hunt
2 Nash Equilibriums
(STAG, STAG): Both would obtain the highest utility
(HARE, HARE): Stands out because if I choose Stag (In hopes of
stag, stag) but the other one chooses Hare, then I end up getting 0
utility
Empirical (Laboratory experiment)
We do not have only pairs but a whole group of 10 people:
If the 10 of them choose Stag then they will get the highest possible
utility
However, if one of them deviates then everyone gets 0 except him
People might be afraid, at least someone might deviate and would
rather secure at least “1” by choosing Hare
Best Stag Implemented: if there is a “manager” controlling you do
not deviate
- Battle of Sexes
