The document provides an overview of game theory, which models strategic interactions between players and is primarily used in economics. It discusses concepts such as Nash equilibrium, the prisoner's dilemma, and different types of games and strategies including pure and mixed strategies. Applications of game theory include the study of oligopolies, cartels, externalities, and military strategies.

2. Managerial Economics
• Submitted To:-
• Sir Yasir Zaman
• Submitted By:-

3. Topic
Game theory

4. Contents
• Game Theory.
• Concept of game theory
• Some Applications of Game Theory
• What is a Game
• Nash Equilibrium
• The Prisoner’s Dilemma
• A Sequential Game
• Pure Strategies
• Mixed Strategies

5. Game theory
• Game theory models strategic behavior by agents
who understand that their actions affect the actions
of other agents.

6. What is the concept of game theory?
• Game theory is the process of modeling the strategic
interaction between two or more players in a situation
containing set rules and outcomes. While used in a
number of disciplines, game theory is most notably used
as a tool within the study of economics.

7. Some Applications of Game Theory
• The study of oligopolies (industries containing only a few
firms)
• The study of cartels; e.g. OPEC.
• The study of externalities; e.g. using a common resource such
as a fishery.
• The study of military strategies.

8. What is a Game?
• A game consists of
• a set of players
• a set of strategies for each player
• the payoffs to each player for every possible list of strategy
choices by the players.

9. Two-Player Games
• A game with just two players is a two-player game.
• We will study only games in which there are two
players, each of whom can choose between only
two strategies.

10. An Example of a Two-Player Game
• The players are called A and B.
• Player A has two strategies, called “Up” and “Down”.
• Player B has two strategies, called “Left” and “Right”.
• The table showing the payoffs to both players for each of the
four possible strategy combinations is the game’s payoff
matrix.

11. Nash Equilibrium
• A play of the game where each strategy is a best
reply to the other is a Nash equilibrium.
• Our example has two Nash equilibria; (U,L) and
(D,R).

12. The Prisoner’s Dilemma
• To see if Pareto-preferred outcomes must be what
we see in the play of a game, consider a famous
second example of a two-player game called the
Prisoner’s Dilemma.

13. A Sequential Game
•Sometimes a game has more than one Nash
equilibrium and it is hard to say which is more
likely to occur than the others.

14. Pure Strategies
• A pure strategy determines all your moves during
the game (and should therefore specify your moves for all
possible other players' moves). A mixed strategy is a
probability distribution over all possible pure
strategies (some of which may get zero weight).

15. Mixed Strategies
• In the theory of games a player is said to use a mixed
strategy whenever he or she chooses to randomize over
the set of available actions. Formally, a mixed strategy is a
probability distribution that assigns to each available
action a likelihood of being selected.