Monday, September 5, 2016

Game Theory
Econ III

- Definition and types; Objective

Game:
- Its an interactive situation specified by the set of participants, the possible lines
of action that can follow each participant, and the set of utilities.

- The Game theory assumes every party involved in the market is rational. It also
assumes that when you launch a product you expect to get something in return,
such as sales, or revenue, or utility.

- There is then:
Players
Lines of action
Utilities
First way to classify them in two groups of games:

- Cooperative games: Players can negotiate and can reach agreements between each
other. There is some institution which ensures the agreements reached u the players
in the negotiation phase. The key to the game is negotiation. Example: Spanish
Politics currently (In this case, the players must ensure that the utility is maximized for
the country).

- Non cooperative games: Each party involved wants to maximize each partys profit.
Thus there is no arrangements. The key to the game is then strategic behavior.
Companies are usually this way, given they compete to get the profit the market may
provide them. (even within this game, companies (or parties) can reach agreements
anyway if that were to provide them with maximization of profits for both parties. In
some case this may even be illegal. Notice though that this is rare, given that
marketing works better at non-cooperative games).
Second way to classify them:

- Simulataneous games: Players play in the same instant of time, so the information is
incomplete at all times. Example: Rock, Paper and Scissors

Monday, September 5, 2016

- Consecutive games: Players take turns. When player 2 plays already knows what
player 1 did. And when this player 1 plays again, he knows what player 2 did.
Examples: Tic Tac Toe, chess, etc.
Third way to classify them:

- Unique games: You play only once. Example: Playing spoof to choose who stays
without drinking that night to drive the car. If you win once, you win that game.

- Repeated games: They are played repeatedly. Example: The same bet as before but
at the best of three. You may change your strategy from time to time. Example: If you
work for the mafia and theres someone who owes you money, and you want your
money back, you have several options: either threaten them by kidnapping wife, or kill
them to place fear so the next borrower knows that they cannot mess with you. Thus
you may conclude that sometimes the non rational option for the particular game (i.e.
killing the person who owes you money) may make sense in the long term for the
other games that will be played in the future.
Objective of a Game:

- We assume rational agents, so the goal will always be to obtain the max utility (profit),
which in game terminology will be to win getting the highest possible payments.

First game:

- The sticks game:

Two players
Each player has to tea either 1 or 2 sticks
You cant fail
The one that loses is the one who takes the last stick.
- Player 1 will always win as long he takes only 1 stick at the first round. We can
see that analyzing the decision tree backwards.

Monday, September 5, 2016

A zero-sum game is one in which the losses of one party are exactly the profits of the
other.
Diagrams solutions are always set by resolving it backwards
In Matrix form of a game there are dominated strategies, which are the ones that will
never be chosen because the results are always inferior to those of another strategy in
the matrix (for that player).
Example:
Player 2

Player 1

8,7

6,12

10,11

9,10

9,3

0,2

A is a dominated
strategy by B for
player 1 because
B will always give
player 1 a higher
outcome than
those in strategy A
(Given player 2
acts rationally and
never choses Z)

Z is a dominated
strategy by Y for
player 2. Because
Y will always give
player 2 a higher
outcome.

Using dominated strategies we can know what the outcome will be. Without dominated
strategies there is no way to know what is going to happen.
There is also dominant strategies, which will no matter what make that strategy the best
on regardless of what the other party choses.

The most famous matrix game theory is called the Prisoners Dilemma Investopedia.
The Nash equilibrium in a game in which there are dominated strategies, is the one that
is individually the best option for either party regardless of what the other choses. In the
Prisoners Dilemma, this is what makes the Confess option the Nash Equilibrium for this
dilemma instead of the result being not confess, which would be better for both parties
involved.
The Nash equilibrium in a game in which there is no dominated strategy, is the option
which will give both parties the same output. Regardless of which one is individually
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Monday, September 5, 2016

better, either of them are equally possible to occur. This happens when there is no
dominated strategy over another one.
A matrix may also give us no Nash equilibrium whatsoever. This happens when neither
of the options give us the same outcome for both parties involved.