Chapter 14
Game Theory
Chapter Outline
14.1
An Overview of Game Theory
14.2 Static Games
NormalForm Games
Predicting a Game’s Outcome
Multiple Nash Equilibria, No Nash Equilibrium, and Mixed Stategies
Cooperation
14.3 Dynamic Games
Sequential Game
Repeated Game
14.4 Auctions
Elements of Auctions
Bidding Strategies in PrivateValue Auctions
Winner’s Curse
Teaching Tips
Chapter 14 is one that you may want to cover in detail, especially if you have a significant number of
management majors or preMBA students. Some students view economic analysis, game theory in
particular, and management strategy as separate entities. The value of this material is that it links pricing
strategy, advertising profits, and entry decisions, and thus demonstrates the importance of understanding
microeconomic theory for good decision making.
The chapter begins with an overview of the game theory and then moves on to static games, where players
must move simultaneously. It then reviews mixed stategies and dynamic games. As with Chapter 13, there
is a substantial amount of selfteaching that can occur by having the class work in groups on selected
problems (see Additional Questions and Problems later in this chapter) designed to make the points from
each section. If the class has to work out the rules for effective strategy on their own, they are more likely
to understand why such rules for behavior are important.
When presenting game theory, consider dividing the class into small groups before making any formal
presentation of types of equilibria and strategic rules. Give each group three or four games to solve, including
a simple zerosum game, a dominant strategy equilibrium where players follow a given strategy no matter
what the other does, and a Nash equilibrium where the payoffs create a prisoners’ dilemma. (The Additional
Questions and Problems section includes sample payoff matrices.) You can ask the groups to simply play
the games at first, under the following rules. First, assume that each player must move simultaneously, and
that no cooperation is allowed. Second, allow collusion between players, and finally, assume that one player
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Microeconomics: Theory and Applications with Calculus
gets to move first. Finally, you could ask the groups to try to write down general decision making rules for
players, and note if they need to modify those rules when the game is played repeatedly. If you try this,
you may find that students are quite good at identifying strategic decision making rules once they understand
the games. By asking students to play the games first, you can then go back through the various outcomes
and identify them as Cournot, cartel, and so on (see Chapter 13). One of the great advantages of game
theory is that by simply changing the rules, the same payoff matrix can be evaluated more than once, with
different outcomes. You can return to this discussion when covering the final section of the chapter on the
comparison of output, price, and welfare effects for the various models.
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 Spring '08
 CONSTANTINE
 Game Theory, Firm, Jim Dearden

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