Lecture 6:
Game Theory

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• Game
– players
– actions
– strategies
– payoffs
•
Extensive Form
•
Normal Form
•
Nash Equilibrium
•
Dominant Strategy
Key Terms in Lecture

Game Theory…
•
In economics we consider an agent choosing actions to
maximize its objective function (subject to constraints)
–
e.g.: choose how much to consume subject to budget constraint
•
Up to now, we have postulated that each given action is
associated with an outcome (possibly probabilistically)
–
We have not worried about interactions between different agents
•
i.e., the actions of one agent have not affected the decision of another
•
What if the impact of Bob’s action on Bob’s utility function
depends on what action Joe takes?
And what if the
impact of Joe’s action on Joe’s utility function depends on
what action Bob takes?
•
Then when Bob chooses his action he has to worry about
what Joe does, and vice versa.

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