chapter 20 game theory

what to do in dynamic game theory

(it is true that life must be understood backward but it should be lived for the future) look forward reason backward anticipate what your rival will do tommarow in response of your actions today

subgame

A partition of a game that can be studied in its own right. It has one initial node and includes are successor nodes, without cutting across information sets.

dynamic game

Players act multiple times, either simultaneously or sequentially

trigger strategy

Situation in which a firm makes clear that it is willing and able to respond to cheating by permanently revoking an agreement.

outcry

a bidder calls out prices

non cooperative game

a game in which each player is out for him or herself and agreements are either not possible or not enforceable

auctions

a sale that is open to the public, during which potential buyers compete for the right to purchase certain items by placing higher and higher bids until the highest bid is reached and auctioneer accepts on behalf of the seller

vickrey auction

a sealed bid auction where the highest bidder wins but pays the price bid by the next highest bidder

payoff matrix

a table that shows the outcome of every choice by every player given the possible choices of all other players

prisoners dilemma

a well known two person game that demonstrates the difficulty of cooperative behavior in certain circumstances

first price auction (seal bid)

all buyers submit bid and the highest bidders pays the price that they submitted

pareto improvement

at least one person is helped and no one is hurt

silent auction

auctioneer calls out pricces

cheap talk

communication that occurs before the game is played that carries no cost and is backed by only trust and not any enforceable agreement

grim trigger strategy

cooperate until rival deviates basically once you cheat the other player will play non cooperatively for the rest of the game no matter what

tit-for-tat

cooperation between competitors if they cooperate in the most recent period, cheat if your competitor cheats in the most recent period

private value auction

each buyer places a subjective value on the item, and in general their values differ. An example might be an auction for a unique piece of art that buyers are hoping to purchase for their own personal enjoyment, not primarily as an investment to be sold later.

a player should enter the market in a entry game if the the following is true

enter if profit > 0

game theory

formal economic reasoning applied in which decisions are interdependent

the bigger the interest the less

future dollars are worth to you ( high interest rates reduce present value of payment in the future)

informed games theory

game theory that i often called behavioral game theory because it relies on emirical observation not deductive logical alone to determine what the players will choose to do

cooperative games

games in which players can form coalitions and can enforce the will of the coalition on its members

open auction (sequential)

her what people bid and then make a bid

second price auction

highest bidder win but they only pay the price of the second highest bid

an outcome is pareto suboptimal

if there is a different outcome which involves a higher payoff for at least one player and does not involve a lower payoff for anyone

an outcome is pareto optimal

if there is no way to help any single person without hurting someone

a strategy is strictly dominant

if they win out on every confrontation

an entry game

incumbent would like to make a threat that they would not have to or be willing to follow through with

dynamic game a players strategy

involves their best strategies/responses at every point of the game where they have to make a decision

screening question

is a question structured in a way to reveal strategic information about the person who asnweres

nash equilibrium

is a set of stratgeies for each player in the game in which no player can improve his pr hers payoff by changing strategy unilaterally

dominant strategy

is a strategy that is preferred by a player regardless of the opponents move

informed game theory

is often called behavior game theory because it relies on empirical observation not deductive logic alone

dutch (tulip) auction descending bid

its a price clock the prices is set and the prices begins to fall and and the first bidder to buzz in stops the clock and gets the good

what to do in a the centipede game

make a prediction about the step right ahead and then take a step back and do it

winners curse

no one knows the true value of the object you are bidding for usually the one with the most optimistic view of value but it's probably the most optimitic view (highest bidder most likely to be over paying the value of the object)

sequential games

players make decisions one after another so one player responds to the known decisions of the other player

subgame perfect nash equilibrium (SPNE)

players strategies are best responses to one another and no incredible threats and no incredible promises

discounting

present day value of future profits is less than value of current profits (discounting expresses money received in future in terms of today's money value to you today)

dynamic games

sequential or repeated games where the players can adjust their actions based on the decisions of other players in the past

seal auctions (simultaneous)

submitting a bid at the same time (sending an envelope to the bidder with what you truely value the object) it is a one time deal

sub games perfect nash equalibrium means

that every subgame in the game is Nash equilibrium meaning every response that they picked is the best option for themselves

optimal roll back strategies assume

that your opponent will choose the best decision

common value auction

the item has a single although unknown value each bidder still has a different value for the object

the player matric shows the three elements of any game which are

the players, their possible strategies and the contingent payoffs

framing effects

the tendency of people based of their choice on how the choice is presented

dependent strategies in game theory

the trigger strategy is basically ill play nice as long as you play nice when anyone breaks this cycle the other immediately responses with a punishment over a certain period of time

difference between tit-for-tat and grim trigger strategy

tit-for-tat the competitors will go back to cooperating one the cheater goes back to cooperating

main reason for second price auction

u literally can bid the most you will truely pay without worrying about a value going up and being forced to pay more

what do we use to represent a dynamic game (which diagram)

usually a tree diagram

endowment effect

when ownership increases the value of a good is even comfirmed by brain scans

backwards induction

where you begin with desired outcome and then determined the decisions that will lead you to that outcome