ECON 102: GAME

THEORY
Department of Economics
University of the Philippines Los Banos
GAME THEORY
Studies the strategic interaction among
different economic agents in the society
Basic Elements

Players
decision maker (individuals, firms)
Strategies
course of action open to a player during a
game (assume: perfect information)
Pay-offs
the final returns to the players of a game at its
conclusion
GAME THEORY
Strategic Games in Normal Form

PLAYER
X 2 Y

X UP1(X,X), UP1(X,Y),
PLAYER
Y UP2(Y,X),
U (X,X) UP2(Y,Y),
U (X,Y)
1 P1 P1
UP2(Y,X) UP2(Y,Y)
STRATEGIC GAMES IN NORMAL
FORM
Assumptions:

The game is common knowledge

among the players
Each decision maker is assumed
rational
Decisions are made under
uncertainty
STRATEGIC GAMES IN
NORMAL FORM
For example,
Jamie
Stay Quiet Talk
Maria Stay Quiet (-1, -1) (-10, 0)
Talk (0, -10) (-3, -3)

Players: Maria and Jamie

Strategies: Stay Quiet or Talk
Payoffs: (-1,-1), (-10,0), (0,-1-) and (-3,-3)
DOMINANT STRATEGY AND
NASH EQUILIBRIUM
Dominant Strategy
A strategy is a dominant strategy if it is the best
strategy for the individual regardless of what
the others strategy is
Nash Equilibrium
A certain strategy set is a Nash equilibrium if
there is no incentive for any individual to
deviate from the given strategy set
If a Nash Equilibrium is brought about by
dominant strategy of the player(s), then
we can call it as a DSNE.
DOMINANT STRATEGY AND
NASH EQUILIBRIUM
I. Dominant-Strategy Equilibrium
Jamie
Stay Quiet Talk
Maria
Stay Quiet (-1, -1) (-10, 0)
Talk (0, -10) (-3, -3)
Jamie always chooses to Talk since his payoffs are always greater
whichever strategy chosen by Maria. Talk is Jamies dominant
strategy
Maria always chooses to Talk since her payoffs are always greater
whichever strategy chosen by Jamie. Talk is Marias dominant
strategy.
Hence, (Talk, Talk) is the dominant-strategy equilibrium
since all players play dominant strategies.
DOMINANT STRATEGY AND
NASH EQUILIBRIUM
No Dominant-Strategy Equilibrium
Robinsons

Advertise Not
SM Advertise
Advertise (6, 6) (10, 1)
Not (4, 12) (20, 4)
Robinsons has a dominant strategy: Advertise
Advertise
SM does not have a dominant strategy.
Hence, there is no equilibrium at dominant
strategy.

However, since Robinsons will always advertise, SM

will choose to advertise (since 6 > 4).
 Examples of strategic games

Prisoners Dilemma
Prisoner 2

Confess Deny

Confess
0, 0 7, -2
Prisoner 1

Deny -2, 7 5, 5
 Battle of the Sexes

Wife

Football Opera

Football
3, 1 0, 0
Husband

Opera 0, 0 1, 3
 Coordination Game

Player 2

Football Tennis

Football
1, 1 0, 0
Player 1

Tennis 0, 0 2, 2
 Matching Pennies

Player 2

Head Tail

Head
1, -1 -1, 1
Player 1

Tail -1, 1 1, -1
 Chicken game (Dove-Hawk)

Player 2

Tough Concede
(Hawk) (Dove)

Tough
(Hawk) -1, -1 10, 0
Player 1

Concede 0, 10 3,3
(Dove)
APPLICATION: OLIGOPOLY (BERTRAND
PRICING)

Firm 2

High Low

High 5, 5 0, 7
Firm 1

Low 7, 0 3, 3

Nash Equilibrium: Low, Low

However it is not efficient,
therefore it is necessary for firm to
collude to achieve efficiency