Econ401 notes - Lecture 3 Proof of game theory - people...

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Lecture 3 Proof of game theory - people choose the Nash equilibrium when they have common knowledge of rationality - By learning and predicting what the other player will do, people can make choices leading to equilibrium - We’ve been looking to at Nash equilibrium under simultaneous decision making, what if there was interaction beforehand? - Offers 0, other person says they won’t accept <5, is there threat credible? - In predatory pricing example, A suffers loss by engaging in a price war, so best strategy would be to acquiesce. Knowing that A’s threat isn’t credible, B can enter the market safely - Centipede game – AD (1,1), moving right gives it to B, BD (0,3), or move right to A, AD (2,2) When do threats matter? - Agree to CC, and LL next period. If someone deviates, next turn we play RR o Because both are in equilibrium, these are credible threats. o If cooperates, person gains 5 one turn, 2 next turn (7) o If person deviates, gain 6 first turn, 0 next turn (6) - Can even have asymmetric equilibrium
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Econ401 notes - Lecture 3 Proof of game theory - people...

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