Game Theory

• Game: Situation in which players (participants) make strategic decisions that take into account each other’s actions and responses.
• Payoff: Value associated with a possible outcome.
• Strategy: Rule or plan of action for playing a game.
• Optimal Strategy: Strategy that maximizes a player’s expected payoff.

Strategic decisions result in payoffs to the players: outcomes that generate rewards or benefits.

<aside> 💡 Stackelberg model is an oligopoly model in which one firm sets its output before other firms do.

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<aside> 💡 Cournot model each firm treats the output of its competitors as fixed, and that all firms simultaneously decide how much to produce.

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Dominant Strategies

<aside> 💡 one that is optimal no matter what an opponent does

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When every player has a dominant strategy, we call the outcome of the game an equilibrium in dominant strategies.

Nash Equilibrium

<aside> 💡 Nash equilibrium is a set of strategies (or actions) such that each player is doing the best it can given the actions of its opponents.

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A dominant strategy equilibrium is a special case of a Nash equilibrium.

Sequential Games

Game in which players move in turn, responding to each others’ actions and reactions.