4/4/2009
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Topic 8: Introduction to Game
Theory
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Introduction to game theory
•
How do we solve models where what I would like
to do depends on what other people will do?
•
We use
game theory
and the concept of
Nash
equilibrium
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– Key building block in modern microeconomics and
in the analysis of imperfect competition
• Firms choosing prices, output, advertising,
investment levels,…
Introduction to game theory
•
Describing a game:
– The set of players:
• Sony, Microsoft and Nintendo
• Helen and Tom
– The actions (strategies) available to the players
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• Price, product design,…
• Rock, paper, scissors
– Payoffs realized by the players, given any
combination of actions

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4/4/2009
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Introduction to game theory
•
Types of games:
– Games with simultaneous moves
– Games with sequential moves
– Repeated games
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Games with simultaneous moves
•
Example 1: Co-operating on a joint term
project
– Helen and Tom need to complete a joint course
project. If they both put in effort, they are
guaranteed to get an A. If only one puts in effort,
they get a B and if neither puts in effort they get a
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they get a B and if neither puts in effort, they get a
C. Assume that for both Helen and Tom, A is worth
30, B is worth 20 and C is worth 10. Putting in
effort costs 11.
Tom
Effort
No effort
Helen
Effort
19,19
9,20
No effort
20,9
10,10
Games with simultaneous moves
•
Example 1:
Tom
Effort
No effort
Helen
Effort
19,19
9,20
No effort
20,9
10,10
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– What is the outcome of this game?
– How do we get there?