1. GAME THEORY AND APPLICATIONS
INTRODUCTION
Assoc. Prof. Yeşim Kuştepeli

2. Assoc. Prof. Yeşim Kuştepeli
History
Antoine Cournot (1838): duopoly application
John von Neuman (1928): theory of parlor games
John von Neuman and Oskar Morgenstern (1944) : Theory of Games and Economic Behaviour
John Nash (1950): Nash Equilibirum
Nash, Harsanyi, Selten (1994): Nobel Prize
Aumann and Schelling (2005): Nobel Prize
Assoc. Prof. Yeşim Kuştepeli

3. Assoc. Prof. Yeşim Kuştepeli
A game is a formal description of strategic situation.
Game theory is the formal study of decision-making where several players must make choices that potentially affect the interest of other players.
Cooperative game theory investigates coalitional games with respect to the amounts of power held by various players or how a successful coalition should divide its proceeds.
Noncooperative game theory investigates the analysis of strategic choices. The ordering and the timing of players’ choices are crucial to the outcome of the game.
Assoc. Prof. Yeşim Kuştepeli

4. Assoc. Prof. Yeşim Kuştepeli
Strategic form (normal form): Each player’s strategies and outcomes resulting from each possible combination of choices are listed.
An outcome is presented by a seperate pay-off for each player that measures how much the player likes the outcome or how much the player will obtain by playing that strategy.
Extensive form (game tree): Complete description of how the game is played over time, including order, information of players, payoffs, probabilities.
Assoc. Prof. Yeşim Kuştepeli

5. Assoc. Prof. Yeşim Kuştepeli
Nash equilibrium
Nash Equilibrium is a list of strategies, one for each player, which has the property that no player can unilaterally change that strategy and get a better payoff.
Assoc. Prof. Yeşim Kuştepeli

6. Assoc. Prof. Yeşim Kuştepeli
Some Important Games
Zero-sum Games
Positive sum Games
Games without Equilibrium
Games with Multiple Equilibria
Prisoner’s Dilemma
Battle of the Sexes
Chicken or Hawk versus Dove
Assoc. Prof. Yeşim Kuştepeli

7. Assoc. Prof. Yeşim Kuştepeli
Player2
Player1
heads
tails
(1,-1)
(-1, 1)
(1, -1)
Assoc. Prof. Yeşim Kuştepeli

8. Assoc. Prof. Yeşim Kuştepeli
Player2
Player1
football
opera
(3,2)
(1, 1)
(2,3)
Assoc. Prof. Yeşim Kuştepeli

9. Assoc. Prof. Yeşim Kuştepeli
Player2
Player1
tough
chicken
(-4,-4)
(10,-1)
(-1, 10)
(5,5)
Assoc. Prof. Yeşim Kuştepeli

10. Assoc. Prof. Yeşim Kuştepeli
Player2
Player1
cooperate
defect
(-1,-1)
(-8, 0)
(0, -8)
(-3,-3)
Assoc. Prof. Yeşim Kuştepeli

11. Assoc. Prof. Yeşim Kuştepeli
Other terminology
Symmetric Games
Repeated Games
Nonrepeated Games
Maxi-min strategy
Pure strategy
Mixed strategy
Static vs. Dynamic Games
Assoc. Prof. Yeşim Kuştepeli