Competiton policy

Game Theory: An introdution

Introduction

• What is game theory?

• Why we need game theory in economic sciences?
A simple game

• N players
• Perfectly rational
• Common Knowledge
• Set of action
• Payoff (what a player receives at the end of the game)
Example

• Player: A, B
• Set of action: A{a1, a2 } ; B{b1,b2,b3}
• Payoff : (2,0) (2,5), ecc...
• Solution (a1, b2)
• Tecnical best response and b2 is strictly dominat for B
Nash Equilibrium

• The outcome of the game (the equilibrium) is giving by

the set of action such that, for each player, each action is
the best response to the action of all other players.
• Equivalenty, a set of actions represent a Nash equilibrium
if none of the players has an incentive to deviate from its
action given the action of all other players.
• 𝜋𝑖 𝛼1∗ , 𝛼2∗ , … , 𝛼𝑖∗ , … , 𝛼𝑛∗ ≥ 𝜋𝑖′ 𝛼1∗ , 𝛼2∗ , … , 𝛼𝑖′ , … , 𝛼𝑛∗
The prisoners’ dilemma
The prisoners’ dilemma

• Only one nash equilibrium (low, low)

• Low is a domint strategy.
• Both players would be better off if they played (high,
high)
• Solution is Pareto inferior.
Equilibrium selection

• Is far from uncommon to find multiple equilibria

• Thiss is adressed by refinement to Nash equilibrium
Pareto dominance
Sometimes, as in the previous game, which is perfectly simmetric,
these refinements would not help much
But in other game as the follow...
Elimination of weakly
dominate strategies
Mixed Strategies

• Untill now only pure strategies

• We can allow player to randomize between action.
• Some game have no equilibrium in pure strategies but can
have an equilibrium in mixed strategies.
Mixed Strategies
Dynamic Game

• Untill now player choose action simultaneously.

• In dynamic game player move sequentialy or more than
once
• We use extensive form of a game.
Dynamic Game

• This is a game in normal form

• We have 2 nash equilibium
• But one is not credible...
• Using exensive form (or game tree)
• We have a further refinemet (SPNE)
Dynamic Game

• In SPNE (sub-game perfect Nash equilibrium)

• In is the set of strategies for each player such that the
strategies form a NE in any sub game of the game
• Backward induction
Dynamic Game

SPNE can be used in games of almost perfect information