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GAMES OF STRATEGY
Fifth Edition
4 t he uses of ga me t heory 36
PART TWO
Fundamental Concepts and Techniques
3 domina nce 92
A. Both Players Have Dominant Strategies 92
B. One Player Has a Dominant Strategy 95
C. Successive Elimination of Dominated Strategies 97
6 t hr ee pl ay ers 104
2 cr it ic a l discussion of t he nash
equilibr ium concep t 139
A. The Treatment of Risk in Nash Equilibrium 140
B. Multiplicity of Nash Equilibria 142
C. Requirements of Rationality for Nash Equilibrium 144
P A R T T HR E E
Some Broad Classes of Strategies and Games
summ a ry 358
k ey t er ms 359
e x ercises 360
a ppendi x: In fer r i ng Probabi l it ies f rom Obser v i ng
Consequences 372
summ a ry 405
k ey t er ms 406
e x ercises 406
a ppendi x: In f i n ite Su ms 417
5 “help!”: a ga me of chick en w it h mi x ed
str ategies 456
summ a ry 460
k ey t er ms 461
e x ercises 461
4 t he h aw k–d ov e ga me 490
A. Rational Strategic Choice and Equilibrium 490
B. Evolutionary Stability for V > C 490
C. Evolutionary Stability for V < C 491
D. V < C: Stable Polymorphic Population 492
E. V < C: Each Player Mixes Strategies 493
F. Some General Theory 494
P A R T F O UR
Applications to Specific Strategic Situations
summ a ry 542
k ey t er ms 543
e x ercises 543
summ a ry 574
k ey t er ms 574
e x ercises 575
C. First-Price Auction 598
D. Second-Price Auction 599
E. All-Pay Auction 601
F. War of Attrition 603
summ a ry 658
k ey t er ms 658
e x ercises 659
17 Bargaining 672
1 t he nash cooper at i v e solu t ion 674
A. Numerical Example 674
B. General Theory 675
summ a ry 699
k ey t er ms 700
e x ercises 700
Glossary705
Index723
Preface
W
e wrote this textbook to make possible the teaching of game theory to first-
or second-year college students at an introductory or “principles” level
without requiring any prior knowledge of the fields where game theory is
used—economics, political science, evolutionary biology, and so forth—
and requiring only minimal high school mathematics. Our aim has succeeded
beyond our expectations. Many such courses now exist where none did twenty-five
years ago; indeed, some of t hese courses have been inspired by our textbook. An even
better sign of success is that competitors and imitators are appearing on the market.
However, success does not justify complacency. We have continued to improve
the material in each new edition in response to feedback from teachers and students
in t hese courses and from our own experiences of using the book.
The main news item for this, the fifth, edition is a switch of Davids. David Reiley,
who was a coauthor on the Third and Fourth Editions, got too busy with his day job
in tech and left the team. Dixit and Skeath w ere fortunate to recruit David McAdams,
who brought new ideas and skills to the team, leading to many tripartite discussions
that have yielded perhaps the most substantial revision and improvement to any of
our editions. We highlight several changes in this preface; they, and many more,
w ill be evident throughout the book.
The new material and improvements in the Fifth Edition include the following,
in rough order of the level of substantive change involved: (1) The chapter on auc-
tions, now Chapter 15, was completely rewritten and brought up to date with recent
developments and examples from Internet auctions. (2) The case study of the Cuban
missile crisis (Chapter 13) was revised in the light of recent disclosures of partici-
xx
to the unsolved sets are reserved for instructors who have a dopted the textbook.
Instructors should contact the publisher about getting access to t hose resources. In
each of the solved and unsolved sets, t here are two kinds of exercises. Some provide
repetition and drill in the techniques developed in the chapter. In others—and, in our
view, those with the most educational value—we take the student step-by-step
through the process of constructing a game-t heoretic model to analyze an issue or
problem. Such experience, gained in some solved exercises and repeated in corre-
sponding unsolved ones, w ill best develop the students’ skills in strategic thinking.
Finally, some suggestions for teachers: The first seven chapters comprise the
basic concepts and tools needed in the chapters that follow. Chapters 8–17 apply
these to several separate topics and fields, including voting, auctions, incentive
design, and so on. Teachers who want to focus on some of t hese special topics can
take their pick and leave out the o thers without loss of continuity. Also, while the
book is aimed at the introductory-level learner, we want to give students a glimpse
of the rich applications of game theory that exist at higher levels. Therefore, each of
the chapters in the second half of the book contains one or two sections with such
material: Chapter 9 has examples illustrating dynamic chicken and bluffing (semi-
separating equilibria), Chapter 12 gives a detailed treatment of the evolutionary
Hawk-Dove game, and so on. Teachers of courses that do not cover t hese topics or
levels can choose to omit them without compromising student learning.
The substance and writing in the book have been improved by the perceptive and
constructive pieces of advice offered by faculty who have used the text in their courses
and numerous others who have read all or parts of the book in other contexts. We
thanked many of these readers for their comments in the prefaces to previous edi-
tions. For the Fifth Edition, we have had the added benefit of extensive comments
from Fiona Carmichael (University of Birmingham, UK), Jihui Chen (Illinois State
University), Martin Dufwenberg (University of Arizona), Henry Duncanson (University
of Bristol, UK), Jens Grosser (Florida State University), Katerina Raoukka (Univer-
sity of Bristol, UK), and Hanzhe Zhang (Michigan State University). Thank you all.
Finally, it is a pleasure to thank Eric Svendsen, our editor at Norton, and his
team, Layne Broadwater, Victoria Reuter, Sean Mintus, and Elizabeth Bowles, for
their efficient shepherding of the book through the production process. We want to
make a special mention of Norma Sims Roche, our copyeditor. She improved our
writing in many places, caught some ambiguities, inconsistencies, and lack of preci-
sion or clarity in our use of terminology, and more generally contributed to making
this edition much better.
Avinash Dixit
Susan Skeath
David McAdams
Introduction and
General Principles
A
ll in t roductory t e x tbooks begin by attempting to convince their stu-
dent readers that the subject is of g reat importance in the world and therefore
merits their attention. The physical sciences and engineering claim to be the
basis of modern technology and therefore of modern life; the social sciences
discuss big issues of governance, such as democracy and taxation; the humanities
claim to revive your soul a fter it has been deadened by exposure to the physical and
social sciences and to engineering. Where does the subject of games of strategy, often
called game theory, fit into this picture, and why should you study it?
We offer a practical motivation that is much more individual and probably closer
to your personal concerns than most other subjects. You play games of strategy all
the time: with your parents, siblings, friends, and enemies, and even with your pro-
fessors. You have probably acquired a lot of instinctive expertise in playing such
games, and we hope you w ill be able to connect what you have already learned to
the discussion that follows. We w ill build on your experience, systematize it, and
develop it to the point where you w ill be able to improve your strategic skills and use
them more methodically. Opportunities for such uses w ill appear throughout your
life; you w ill go on playing such games with your employers, employees, spouses,
children, and even strangers.
Not that the subject lacks wider importance. Similar games are played in busi-
ness, politics, diplomacy, and war—in fact, whenever p eople interact to strike mutu-
ally agreeable deals or to resolve conflicts. Being able to recognize such games w ill
enrich your understanding of the world around you and w ill make you a better par-
ticipant in all its affairs. Understanding games of strategy w ill also have a more