ECON Game Theory
Coordination game
A game in which all players have a common interest in coordinating their choices
Strategic plan
A list of instructions that describes how to respond to any possible situation
One shot game
A strategic interaction that occurs only once
Collusion
An agreement by rivals not to compete with each other but instead to charge high prices (usually occurs in indefinitely repeated games)
Nash equilibrium
An equilibrium in which the choice that each player makes is a best response to the choices other players are making
The first-mover advantage is about the benefits of...
Commitment
Grim Trigger Strategy: If the other players have cooperated in all previous rounds, then you'll...
Cooperate
Best responses
Each player's choice is their best response to what they expect the other to choose
Correct expectations
Each player's expectation about what they other player will choose is also correct
The second-mover advantage is about the benefits of...
Flexibility
Anti-Coordination Games
Games in which your best response is to take a different, but complementary, action to the other player (go where others are not)
Grim Trigger Strategies can encourage cooperation in...
Indefinitely repeated games
Finitely repeated game
One in which you face the same strategic interaction a fixed number of times
Indefinitely repeated game
One in which you face the same strategic interaction an unknown number of times
Game tree
Shows how a game plays out over time, with the first move forming the trunk, each subsequent choice branching out, and the final leaves showing all possible outcomes
Good and Bad Equilibria
Sometimes multiple equilibria lead to scenarios in which both good outcomes and bad outcomes are equilibria
Solving Coordination Problems (simultaneous game)
Step 1: Consider all the possibilities Step 2: Consider the "what ifs" Step 3: Play your best response Step 4: Put yourself in the other player's shoes
The Four Steps for Making Good Strategic Decisions
Step 1: Consider all the possible outcomes Step 2: Think about the "what ifs" separately Step 3: Your best response is the choice that yields the highest payoff given the other player's choices Step 4: Put yourself in someone else's shoes
Second-mover advantage
The strategic advantage that can follow from taking an action that adapts to your rival's choice
Prisoner's Dilemma
The temptation to take advantage undermines cooperation
Repeated game
When you face the same strategic interaction with the same rivals and the same payoff in successive periods
Grim Trigger Strategy: If any player has defected in any previous round, you'll...
defect
Sequential games create...
first- and second-mover advantages
Solve finitely repeated games by...
looking forward and reasoning backward
Grim Trigger Strategy
punishes your rival for not cooperating
First mover advantage
the strategic gain from an anticipatory action that can force a rival to respond less aggressively, occurs when you commit to being aggressive