MICROECONOMICS II

GAME THEORY
PRESENTED BY
ISHITA CHANDRA (8812)
VANI TRIPATHI (881O)
MUSKAN (8818)
 Game Theory : The Study of Strategic Decision-Making

INTRODUCTION

Game theory is a theoretical

framework for conceiving social
situations among competing players.
In some respects, game theory is
the science of strategy, or the
optimal decision-making of
independent and competing actors in
JOHN VON NEUMANN OSKAR MORGENSTERN a strategic setting.

GAME

MOVES

PAYOFF

n number of must be legal & outcome of the

individuals as per limit game
 HOW GAME THEORY
WORKS

The key to game

theory is that one
player's payoff is
contingent on the
strategy
implemented by the
other player.

The game identifies

the players' Game theory has a wide
identities, range of applications,
interactive situation including psychology,
preferences, and
evolutionary biology,
available war, politics,
strategies and how economics, and
rational players
these strategies business.
affect the outcome.
 The Nash Equilibrium

In 195O, John Nash characterized a

notion of equilibrium for n- person
games, and it is now called the
“Nash equilibrium.”

It is a concept of game theory where

the optimal outcome of a game is one
where no player has an incentive to
deviate from their chosen strategy
after considering an opponent's
choice. John Forbes Nash Jr.

Nash equilibrium is witnessed over

time and once it is reached, it will
not be deviated from.
 Types of Game Theories
Symmetric game - where the
payoffs for playing a
particular strategy depend
only on the other strategies
employed, not on who is
playing them.
Asymmetric game - while both
players have access to the
same options, the
corresponding rewards for each
are different based on the
players preferences.
Simultaneous or
Cooperative game is a game with
static game -
where each player competition between groups of
chooses their players due to the possibility
action without of external enforcement of
knowledge of the cooperative behavior (e.g.
actions chosen by through contract law).
other players.
Sequential game - A non-cooperative game is
where one player a game with competition
chooses their action between individual
before the others players, as opposed to
choose theirs. The
other players must
cooperative games.
have information on
the first player's
choice.
 THE PRISONER'S DILEMMA

B STAYS B BETRAYS
SILENT A
(COOPERATES) (DEFECTS)

A serves 3
A STAYS SILENT Both serve
years,
(COOPERATES) 1 year
B goes free

A goes free,
A BETRAYS B Both serve
B serves 3
(DEFECTS) 2 years
years
 DICTATOR GAME

Consists of two The dictator The amount

individuals must offer some offered should
One is given amount of that be accepted,
money (the money to the even if it is
dictator) second unsatisfactory
Other is given participant, for the other
nothing even if that player.
amount is zero.
 Volunteer’s Dilemma

The volunteer's dilemma game models a situation in which each player

can either make a small sacrifice that benefits everybody, or instead
wait in hope of benefiting from someone else's sacrifice.

Example - Electricity supply has failed

for an entire neighborhood.

Electricity company will fix the problem

as long as at least one person calls to
notify them, at some cost.

If no one volunteers, the worst possible

outcome is obtained for all participants.

If any one person elects to volunteer,

the rest benefit by not doing so.
 THE CENTIPEDE GAME

The centipede game was first

introduced by Robert
Rosenthal in 1981.
It is a game in which two
players alternate to take a
share of an ever-increasing
sum of money.
It is an innovative approach
to the conflict between
self-interest and mutual
benefit.
 GAME THEORY IN ECONOMICS
Game theory grew
as an attempt to
find the solution
to the problems of
duopoly, oligopoly
and bilateral
monopoly.
In all these market
situations, a
determinate solution is
difficult to arrive at
due to the conflicting
interests and
strategies of the
individuals and
organisations.
 ZERO-SUM GAME

It involves In
A zero-sum
Zero-sum two sides, financial For every
game
game is a where the markets, person
may have
mathematical result is options and who
as few as
representation an futures are gains on a
two players
in advantage examples of contract,
or as
game theory for one zero-sum there is a
many as
and economic side and an games, counter-party
millions
theory of equivalent excluding who
of
a situation. loss for transaction loses.
participants.
the other. costs.
 Pay-off Matrix and Strategies

A payoff A payoff
matrix is a It matrix can
visual includes be used to
representation data for calculate
of the opponents, the
possible strategies, aggregate
outcomes of a and outcome and
strategic outcomes. to predict a
decision. strategy.

Example
 Non-Constant-Sum Games

In non-constant- The solution lies in

In sum game if player either collusion or
constant- A employs an non-collusion
sum game no optimal mixed between the two
players. The former
player is strategy, player В
is known as
able to can increase his
cooperative non-
affect the expected pay-off constant-sum game
combined by not following and the latter as
the same mixed non-cooperative non-
pay-off.
strategy. constant-sum game.
 Importance of Game Theory

Shows Used to explain Provides main

the market basis for
importance to
equilibrium economic
duopolists of
when there are application of
finding some more than two the theory of
way to agree firms games

Highlights Helpful in
solving the
importance of
problems of
self-interest
business,
in the labour and
business world management.
 Limitations of Game Theory

Unrealistic Has not been Strategies

developed followed by
assumption that rivals lead to an
firms are aware for games endless chain of
of each other's with more thought which is
strategies than four highly
players impracticable

Players will The question

of making the
not act
best of the
rationally in
worst does
real-life not arise at
scenarios all
 IMPACT OF GAME THEORY

Game theory
In business,
brought about a
game theory is
revolution in
beneficial for
economics by
modeling
addressing
competing
crucial problems
behaviours
in prior
between economic
mathematical
agents.
economic models.
 Bibliography

Theory of Games and Economic Behaviour by

John von Neumann and Oskar Morgenstern
John Nash : Equilibrium points in n-person
games