Logistics

Game Theory and Strategy

Introduction Levent Kokesen c
Ko University c

Textbook: Lecture notes posted on the course page Following are useful as supplements: Martin J. Osborne, An Introduction to Game Theory Avinash K. Dixit, Susan Skeath, David H. Reiley, Games of Strategy Prerequisites: Mathematical notation and formal reasoning (Must) Calculus and basic probability (Must) Intermediate microeconomics (Useful)

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Logistics
Grading: Exam I Exam II Class Participation Problem Sets: Problem sets, past exams, and solutions on the website Not graded, but you should do them Discussion Sessions: Check the course page Oce Hours: Check the course page 50% 50% 10% First half Second half In-class games and quizzes

Game Theory: Denition and Assumptions

Game theory studies strategic interactions within a group of individuals

Actions of each individual have an eect on the outcome Individuals are aware of that fact have well-dened objectives over the set of possible outcomes implement the best available strategy to pursue them

Individuals are rational

Rules of the game and rationality are common knowledge

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Example: A Single Person Decision Problem

Ali is an investor with $100 State Good Bad 10% 10% 20% 0%

An Investment Game
Ali again has two options for investing his $100:

invest in bonds

certain return of 10% successful: return is 20% failure: return is 0%

Bonds Stocks

invest it in a risky venture

Which one is better? Probability of the good state p Assume that Ali wants to maximize the amount of money he has at the end of the year. Bonds: $110 Stocks: average (or expected) money holdings: p 120 + (1 p) 100 = 100 + 20 p If p > 1/2 invest in stocks If p < 1/2 invest in bonds
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venture is successful if and only if total investment is at least $200

There is one other potential investor in the venture (Beril) who is in the same situation as Ali They cannot communicate and have to make the investment decision without knowing the decisions of each other Beril Bonds Venture 110, 110 110, 100 100, 110 120, 120
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Bonds Ali Venture

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Entry Game
Strategic (or Normal) Form Games

Investment Game with Incomplete Information

used if players choose their strategies without knowing the choices of others used if some players know what others have done when playing

Extensive Form Games

Some players have private (and others have incomplete) information Ali is not certain about Berils preferences. He believes that she is

Normal with probability p Crazy with probability 1 p

Beril Bonds Venture 110, 110 110, 100 100, 110 120, 120 Normal (p) Beril Bonds Venture 110, 110 110, 120 100, 110 120, 120 Crazy (1 p)

P Out 0, 4 A 2, 2
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Ali

Bonds Venture

Bonds Venture

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The Dating Game

Ali takes Beril out on a date Beril wants to marry a smart guy but does not know whether Ali is smart She believes that he is smart with probability 1/3 Ali decides whether to be funny or quite Observing Alis demeanor, Beril decides what to do
2, 1
marry quite marry

Game Forms

Information

Complete Strategic Form Games with Complete Information

Incomplete Strategic Form Games with Incomplete Information

1, 1

Simultaneous

funny

0, 0

dump (1/3) smart

dump

1, 0

Moves Extensive Form Games with Complete Information Extensive Form Games with Incomplete Information

Nature

Sequential
2, 0
marry (2/3) dumb marry

1, 0

quite dump

funny dump

0, 1

3, 1

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Outline of the Course

1 2

3 4

Strategic Form Games Dominant Strategy Equilibrium and Iterated Elimination of Dominated Actions Nash Equilibrium: Theory Nash Equilibrium: Applications
1 2 3 4

Auctions Buyer-Seller Games Market Competition Electoral Competition

5 6 7 8

Mixed Strategy Equilibrium Games with Incomplete Information and Bayesian Equilibrium Auctions Extensive Form Games: Theory
1 2

Perfect Information Games and Backward Induction Equilibrium Imperfect Information Games and Subgame Perfect Equilibrium Stackelberg Duopoly Bargaining Repeated Games Perfect Bayesian Equilibrium Sequential Equilibrium Signaling Games
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Extensive Form Games: Applications

1 2 3

10

Extensive Form Games with Incomplete Information

1 2 3

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