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Ch10-Game - Chapter10 WhatisGameTheory ,multi...

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Chapter 10 Game Theory and Strategic Thinking
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2 What is Game Theory? Game theory is the study of interactive, multi- person decision problems. A game consists of: Players Strategies Payoff
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3 Game Theory & Economics Nowadays, Game theory applies to various fields  of economics and business. Industrial organization – Oligopolies Trading processes – Bargaining, Auctions Labor economics – firms behavior in input markets International trade – strategic trade policies
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4 Game Theory Offers You… Before spending time on game theory, we take a  look at what game theory offers you. You play game with your classmates, lecturers,  employer, lovers(!!), and even strangers.  Understanding game theory put you in an  advantageous situation. You obtain a better grade in economics and  business course if you understand game theory  well.
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5 Game Theory Offers You… We do not claim that game theory will teach you  the secrets of perfect play or ensure that you will  never lose. (Your opponent can read some similar books!) What it does is to provide some general principles  for thinking about strategic interactions. You have to supplement these ideas and some  calculation with many details before you can devise a  successful strategy.
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6 Decision Vs Games In a decision your payoff does not  depend on the  decision made by any other individual. While in a game, the payoff (at least one player)  depends not only on his own action, but also the  actions of players.
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7 Examples 100m Dash It is just  an optimization problem. Marathon There are interactions   between runners.  Should you lead to set the pace? How soon before the finish should you try to break  away?
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8 Examples Tossing coins A coin is tossed and you must guess the outcome of the  toss. If you are correct, you win $1. Matching pennies I conceal a penny with either Head or Tail up. You  must guess which one is up. If you are correct, you win  $1 from me. If you are incorrect, you lose $1 to me.
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9 Solving the Game Games are harder to solve than decision.  In matching pennies, whether you should guess  head or tail depends on what you think I will do .   At the same time, what I should do depends on  what I expect you will guess.
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10 Rationality & Common Knowledge In our analysis, we assume that the players of a  game know what the game is: Who are the players What are the actions available to each players What is each players’ payoff for every possible  outcome
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