Econ 101
Microeconomic Theory
Professor Jernej Copic
Week 2 Handout
Hyo Sang Kim
K
EY
I
DEAS
•
A
Nash equilibrium (NE)
is stable in that, even if all players revealed their strategies to each
other, no player would have an incentive to deviate from his or her equilibrium strategy and choose
something else.
•
A
Subgame perfect Nash equilibrium (SPNE)
is a strategy profile that is a Nash equilibrium on
every proper subgame.
–
A
subgame
is every subset of the game tree that looks like a game itself.
– Backward induction
is a shortcut for finding the SPNE. (1) Identify the subgames at the
bottom of the game tree. (2) Find the Nash equilibria on these subgames. (3) Replace the sub
games with the actions and payoffs resulting from Nash equilibrium play on these subgames.
(4) Move up to the next level of subgames and repeat the procedure.
•
Extensive form vs Normal form
E
XERCISES
1. Consider the following two player game in extensive form.
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 Spring '08
 Buddin
 Game Theory, player, Nash, Professor Jernej Copic

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