4/4/20091Topic 8: Introduction to Game TheoryUSC MarshallIntroduction 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 equilibriumUSC Marshall– 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 playersUSC Marshall• Price, product design,…• Rock, paper, scissors– Payoffs realized by the players, given any combination of actions
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4/4/20092Introduction to game theory•Types of games:– Games with simultaneous moves– Games with sequential moves– Repeated gamesUSC MarshallGames 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 aUSC Marshallthey 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.TomEffortNo effortHelenEffort19,199,20No effort20,910,10Games with simultaneous moves•Example 1:TomEffortNo effortHelenEffort19,199,20No effort20,910,10USC Marshall– What is the outcome of this game?– How do we get there?