GAME THEORY ECONOMICS - EKRAM ATTAI

1. EKRAM ATTAI
GAME THEORY

2. CONTENTS
• What is a Game?
• Types of Games
• Game Theory and Economics
• The Basis of Game Theory
• Solutions of the Games

3. What is a Game?
I. A game is a situation where the participants’ payoffs depend not
only on their decisions, but also on their rivals’ decisions.
II. This is called Strategic Interactions:
I. My optimal decisions will depend on what others do in the game.
• Four elements to describe a game:
1. Players
2. Rules: when each player moves
3. Outcomes of the moves
4. Payoffs of each possible outcome

4. Types of Games
A. NON COOPERATIVE GAME
B. COOPERATIVE GAME
C. REPEATED GAME
D. SEQUENTIAL GAME

5. Game Theory and Economics
Game theory is the study of how people behave in strategic situations.
Strategic decisions are those in which each person, in deciding what
actions to take, must consider how others might respond to that
action.
Designed to evaluate situation where individuals and Organization can
have conflicting Objectives.

6. I. If the market is composed by a small number of firms,
each firm must act strategically.
II. Each firm affects the market price and changing the
quantity produced.

7. BOUNTY VS KIT KAT
Suppose both of the firms are producing 100 units.
If one of the firms decides to increase the production by 10 units,
The market supply will increase from 200 to 210 and the price has to
drop to reach an equilibrium.
Therefore, it also affects the profits of other firms.
Each firm knows that its profit depends not only on how much it
produced but also on how much the other firms produce.

8. The Basis of Game Theory
I. The prisoner’s dilemma
II. Nash equilibrium and welfare
III. Retaliation

9. The prisoner’s dilemma
• The prisoner’s dilemma shows quite elegantly how difficult it is to get
agents to cooperate, even when this cooperation is beneficial to all
agents.

10. Nash equilibrium and welfare
Definition of a Nash equilibrium:
A situation where no player can improve his outcome by unilaterally changing his strategy
Central properties:
• The Nash equilibrium is generally stable
• Every game has at least one Nash equilibrium:
• Either in pure strategies : Players only play a single strategy in equilibrium
• Or in mixed strategies : Players play a combination of several strategies with a fixed
probability
• The proof of this result is the main contribution of John Nash (and the reason why it is called
a Nash equilibrium)

11. Retaliation
Players can retaliate, and thus influence the decisions of other players

12. Solutions of the Games
I. To predict what will be the solution/outcome of the game we need
some tools:
I. Dominated and Dominant strategies
A strategy that gives higher payoffs no matter what the opponent does
I. Nash equilibrium
The decisions of the players are a Nash Equilibrium if no individual prefers a
different choice.
In other words, each player is choosing the best strategy, given the strategies
chosen by the other players.

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