Microeconomics
Course E
John Hey
Chapter 30
• GAME THEORY
• Up to now we have considered
situations in which individuals take
decisions independently of the
decisions of others.
• Today we consider situations of
interdependence – games.
• It will be useful when we examine
duopoly.
GAMES
• In general many players and
many decisions.
• We start by considering games in
which there are two players (1
and 2) each with two decisions (A
and B).
• Their payoffs depend on the
decisions of both players.
A Dominating Choice
• A player has a dominating
choice if it is best
independently of the choice of
the other player.
A Nash Equilibrium
• A combination of choices in a game
is called a Nash equilibrium if neither
player wants to change his or her
choice given the choice of the other
player.
• Does a Nash Equilibrium always
exist?
Pareto Dominance
• When one outcome is better for both
players than some other outcome, we say
that the first outcome Pareto Dominates
the second.
• We note that the Nash Equilibrium (AA) in
the Prisoners’ Dilemma is Pareto
Dominated by BB.
A Continuum of Choices
• When we consider duopoly, the two
players do not choose just from two
choices but choose the value of some
variable.
• We have exactly the same concepts.
Chapter 30
• A player has a dominating choice if this choice is best
independently of the choice of the other.
• A combination of choices in a game is called a Nash
equilibrium if neither player wants to change his or
her choice given the choice of the other player
• Games may have no Nash Equilibria (in pure
strategies), a unique Nash Equilibrium of several
Nash equilibria.
Chapter 30
• Goodbye!