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