Game Theory: Key Concepts Zero Sum Games Zero Sum Games Non – Zero Sum Games Non – Zero Sum Games Strategic Form Games  Lay out strategies Strategic Form Games  Lay out strategies Extended Form Games  Emphasize dynamics Extended Form Games  Emphasize dynamics You move / they move / you move … You move / they move / you move … Flavors of Dominance Flavors of Dominance Dominance Dominance Weak Dominance Weak Dominance Iterated Dominance Iterated Dominance

Game Theory: More Concepts Nash equilibrium Nash equilibrium Once you’re there, no one wants to move from there on his own Once you’re there, no one wants to move from there on his own Social convention / Moral sentiment Social convention / Moral sentiment Mixed strategies Mixed strategies Backward Induction Backward Induction End gaming End gaming First mover advantage First mover advantage

Games People Play Prisoners’ Dilemma Prisoners’ Dilemma Easy Coordination Game Easy Coordination Game Chicken Chicken City Game City Game Ultimatum Game Ultimatum Game Centipede Game Centipede Game Threat Game Threat Game Trust Game Trust Game Hostage Game Hostage Game

Game Theory: Yet More Concepts Reciprocity / Repetition Reciprocity / Repetition Expected value / Present value Expected value / Present value Folk Theorem For repetitive play, any outcome that give players an expected present value greater than the Max-Min payoff can be sustained as an equilibrium For repetitive play, any outcome that give players an expected present value greater than the Max-Min payoff can be sustained as an equilibrium All players choose that outcome so long as no one deviates from it  Nash equilibrium All players choose that outcome so long as no one deviates from it  Nash equilibrium Golden Rules Naïve cooperation Naïve cooperation Grim cooperation Grim cooperation Tit – for – tat Tit – for – tat

Game Theory: More Concepts Credibility Credibility Tie your hands Tie your hands Rational irrationality Rational irrationality Reputation: build trust/credibility Reputation: build trust/credibility When two reputations at stake When two reputations at stake Trust game  cooperation Trust game  cooperation Threat game  conflict Threat game  conflict Multiple constituencies Multiple constituencies Ben & Jerry’s: All are family … or tight ship? Ben & Jerry’s: All are family … or tight ship?

Collusion … and Its Discontents Lots of Nash equilibria … which one to choose? Lots of Nash equilibria … which one to choose? Finite horizon … endgaming Finite horizon … endgaming New entrants … endgaming New entrants … endgaming Noise Noise Uncertainty about who did what Uncertainty about who did what Uncertainty about intentions Uncertainty about intentions Many players Many players Heavy discount of future Heavy discount of future Large payoff NOW Large payoff NOW