rlecture19 - game theory

rlecture19 - game theory - Topic 8: Introduction to Game...

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Topic 8: Introduction to Game Theory USC Marshall
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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 – Key building block in modern microeconomics and in the analysis of imperfect competition • Firms choosing prices, output, advertising, investment levels,… USC Marshall
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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 • Price, product design,… • Rock, paper, scissors – Payoffs realized by the players, given any combination of actions USC Marshall
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Introduction to game theory • Types of games: – Games with simultaneous moves – Games with sequential moves – Repeated games USC Marshall
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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 Assume that for both Helen and Tom A is worth 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 elen Effort 19,19 9,20 USC Marshall Helen No effort 20,9 10,10
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Games with simultaneous moves Example 1: Tom Effort No effort Effort 19,19 9,20 hat is the outcome of this game? Helen No effort 20,9 10,10 What is the outcome of this game? – How do we get there? USC Marshall
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Games with simultaneous moves Example 1: Tom Effort No effort Effort 19,19 9,20 onsider Tom: No matter what Helen does Tom is Helen No effort 20,9 10,10 Consider Tom: No matter what Helen does, Tom is better off putting in no effort • 20>19 and 10>9 – Similarly for Helen • Each chooses to put in no effort USC Marshall
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Games with simultaneous moves Example 2: Two people accused of a crime they committed together are held in separate interrogation rooms. If neither of them confesses, they can be convicted only of a minor crime and get 2 months in jail. If one confesses, the prosecutor cuts a deal, reducing his sentence own to 1 month while the other gets the full down to 1 month while the other gets the full sentence of 5 months. Finally, if both confess, they each get 5 months in jail USC Marshall
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Games with simultaneous moves Example 2: ccused B Accused B Confess Don’t confess ccused Confess -5,-5 -1,-5 Accused A Don’t confess -5,-1 -2,-2 – What is the equilibrium outcome of this game? USC Marshall
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Games with simultaneous moves Example 2: ccused B Accused B Confess Don’t confess ccused Confess -5,-5 -1,-5 Accused A Don’t confess -5,-1 -2,-2 – What is the equilibrium outcome of this game?
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This note was uploaded on 09/10/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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rlecture19 - game theory - Topic 8: Introduction to Game...

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