This document provides an overview of game theory, including: 1) Game theory is the study of strategically interdependent decision-making between players in a game. It examines why competitors behave similarly and how players in the Cold War determined nuclear weapon levels. 2) A game has players, strategies, payoffs, and outcomes. It can be finite or infinite, stable or unstable. Players can have complete or incomplete information. 3) Nash equilibrium describes situations where players lack incentive to deviate from their strategy given another player's strategy. The prisoner's dilemma exemplifies this.

1. Game Theory

2. TABLE OF CONTENTS
Definition of Game Theory
History, Brief Description and
Types
I
Information and Rationality
Pay off and Market Entry
III
Nash Equilibria
Types and Prisoner Dilemma
II
Bargaining
Bargaining Games and Nash
Bargaining
IV
Bidding and Values
V
Auctions

3. Game Theory - Study of strategically interdependent
decision-making, where several players must affect the
interest of other players in a game
 Why do competitors stay close to each other?
 More nuclear weapons in the Cold War or less ?
 Rock, Paper, Scissors, Which do you choose?
 Can some games be solved ? (Tic Tac Toe, Chess, Go)

4. What actually “The Game” is …
Interaction between players
 Game – Formal description of a strategic situation
 Player – agent to make decision
 Pay-off – utility and desirability of an outcome
 Strategy – possible plan or actions to follow

5. Agreed upon Objective – W/L
Known and Unknown Players
Changeable Rules
Perpetuate the Game
Types and Features of Games
Known Players
Fixed Rules
Finite Games Infinite Games
Stable
Games
Unstable
GamesBUSINESS

6. Complete information: firms know all strategies and profits.
Information and Rationality
Incomplete information
Private information
High transaction costs

7. Rationality
We normally assume that rational players consistently choose
actions that are in their best interests given the information they
have. They are able to choose profit-maximizing strategies.
Information and Rationality
Bounded Rationality
Managers with limited powers of calculation or logical inference
try to maximize profits. But, due to their cognitive limitations, do
not always succeed.

8. Example
Information and Rationality
Investment game: Google and
Samsung must decide ‘to invest’ or ‘do
not invest’ in complementary products
that “go together.” (Chrome OS and
Chromebook, respectively)

9. Maximin Strategies
Information and Rationality
A maximin strategy maximizes the minimum profit. This
approach ensures the best possible profit if your rival takes
the action that is worst for you.
The maximin solution for the game is for Google to
invest and for Samsung not to invest

10. INTERACTION OF TRANSACTION
M SELLER
M BUYERS
1 SELLER
M BUYERS
1 Seller
1 Buyer
BARGAINING
AUCTIONS
MARKETPLACE

11. Bargaining
What is the fairest way to split 1 $ between two
parties of opposite interest ?
Pay the lowest price against seller VS
who wants to get the highest price
Nash Bargaining
(X, 1-x) Disagreement point - (d, d2)
Utility function – u, u2

12. Nash Bargaining
 Symmetry – If players are identical, split equally (u=u2)
 Pareto Efficiency – use entire 1 $ when splitting
 Alternatives – preferred will be preferred
 Strategy – possible plan or actions to follow
=> SOLUTION - which is to maximize the product of the payoffs over the
disagreement point.
max (u1(x1) – u1(d1))(u2(x2) – u2(d2))

13. Auctions
Service is sold to the highest bidder in CLOSED and OPEN states
English auction – ascending big (Going!, Going!, GONE!)
Dutch auction - descending bid (Google IPO)
Sealed-bid auction – no one knows how much others bid,
winner pays the second highest

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15. THANKS