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nlecture19 - game theory - slides

# nlecture19 - game theory - slides - Topic 8 Introduction to...

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4/4/2009 1 Topic 8: Introduction to Game Theory USC Marshall 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 USC 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 players USC Marshall • Price, product design,… • Rock, paper, scissors – Payoffs realized by the players, given any combination of actions

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4/4/2009 2 Introduction to game theory Types of games: – Games with simultaneous moves – Games with sequential moves – Repeated games USC Marshall 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 USC Marshall 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 USC Marshall – What is the outcome of this game? – How do we get there?