This textbook is an introduction to game theory, which is the systematic analysis of decision-making in interactive settings. Game theory can be of great value to business managers. The ability to correctly anticipate countermove by rival firms in competitive and cooperative settings enables managers to make more effective marketing, advertising, pricing, and other business decisions to optimally achieve the firm's objectives. Game theory does not always accurately predict how rivals will act in strategic situations, but does identify a decision maker's best response to situations involving move and countermove. As Nobel Prize winner Thomas Shelling noted: "We may wish to understand how participants actually do conduct themselves in conflict situations; an understanding of the `correct' play may give us a bench mark for the study of actual behavior." The concise and axiomatic approach to the material presented in this textbook is easily accessible to students with a background in the principles of microeconomics and college mathematics. The selection and organizations of topics makes the textbook appropriate for use in a wide range of curricula by students with different backgrounds.
PREFACE 1 INTRODUCTION TO GAME THEORY Introduction Strategic behavior Short history of game theory Lexicon of game theory Rational versus actual behavior Practice Exercises PART I: STATIC GAMES WITH COMPLETE INFORMATION 2 COALITION GAMES Introduction Prisoner's dilemma The extensive form The normal form Nash equilibrium Shortcut for finding-pure strategy Nash equilibria Determinants of business collusion Number of firms with similar interests Firm size relative to the industry Visibility Practice Exercises 3 STRATEGIC MOVES AND DETERRING DEFECTION Introduction Strategic moves Deterring defection Contracts Reputation Cutting off communications Preventing retreat Brinksmanship Incrementalism Teamwork Agents Practice exercises 4 COMPETITION GAMES Introduction Strictly-dominant strategies Weakly-dominant strategies Iterated elimination of dominated strategies Three-player games Non-dominant strategies Maximin (secure) strategy Practice exercises 5 COORDINATION GAMES Introduction Battle-of-the-sexes game Focal-point equilibrium Developing a theory of focal-point equilibria Framing Practice Exercises 6 INFINITELY-REPEATED GAMES Introduction Coalitions Repeated static games Trigger strategies Evaluating payoffs in infinitely-repeated games Practice Exercises 7 FINITELY-REPEATED GAMES Introduction Finitely-repeated games with a certain end End-of-game problem Finitely-repeated games with an uncertain end A word of caution Concluding remarks Practice Exercises 8 EVOLUTION GAMES Introduction Evolutionary game theory Reproductive success Evolutionary equilibrium Networks Positive feedback effects Network game Implications Practice Exercises 9 TIT-FOR-TAT Introduction Tit-for-tat End-of-game problem Practice Exercises 10 MIXING PURE STRATEGIES Introduction Zero-sum games Matching pennies Minimax theorem Mixed strategies Optimal mixing rules Calculating optimal mixing rules When to use optimal mixing rules How to use optimal mixing rules Bluffing Practice Exercises 11. CONTINUOUS STRATEGIES Introduction Continuous strategies Best-response (reaction) functions Tragedy of the commons Shifting best-response functions Practice Exercises 12. STATIC OLIGOPOLY GAMES Introduction Cournot model Advertising in a Cournot setting Bertrand model Bertrand paradox Practice Exercises 13. STRATEGIC TRADE POLICY Introduction Discrete pure strategies Continuous pure strategies National welfare Intraindustry trade Imperfect competition Intraindustry coalitions Export subsidies Reciprocity Practice Exercises 14. PRODUCT DIFFERENTIATION Introduction Horizontal differentiation Vertical differentiation Location Product differences Practice exercises 15. STRATEGIC COMPLEMENTS Introduction Double marginalization Practice exercises PART II: DYNAMIC GAMES WITH COMPLETE AND PERFECT INFORMATION 16. GAME TREES Introduction Game trees Subgame perfection Backward induction Credible threats First-mover advantage Entry deterrence Practice Exercises 17. A DYNAMIC OLIGOPOLY GAME Introduction Stackelberg model Practice Exercises 18. BARGAINING Introduction The bargaining problem Ultimatum bargaining Ultimatum paradox Nash bargaining Rubenstein bargaining Last-mover's advantage Symmetric impatience Asymmetric impatience Practice Exercises PART III: GAMES WITH INCOMPLETE INFORMATION 19. DECISION MAKING AND UNCERTAINTY Introduction Risk and uncertainty Static games with uncertain payoffs Static games in extensive form Dynamic games with uncertain payoffs Attitudes towards risk Risk aversion Understanding risk-averse behavior Practice Exercises 20. ADVERSE SELECTION Introduction The market for lemons Practice Exercises 21. INCENTIVE CONTRACTS Introduction Principal-agent problem Incentive contracts Principal-agent problem with moral hazard Practice Exercises PART IV: GAMES WITH IMPERFECT INFORMATION 22. INFORMATION SETS Introduction Information sets Bayesian updating Practice Exercises 23. AUCTIONS Introduction Types of auctions Information structures Complete-information auctions Sealed-bid, first-price auction Sealed-bid, second-price auction English auction Dutch auction Expected revenues from complete-information auctions Incomplete-information auctions with independent private values Sealed-bid, first-price auction Sealed-bid, second-price auction English auction Dutch auction Expected revenues from incomplete-information auctions with independent private values Incomplete-information auctions with correlated value estimates Common-value auctions and the winner's curse Incomplete-information auctions and risk aversion Practice exercises 24. SIGNALING Introduction Spence education game Pooling strategy Separating strategy Corporate investment game Multiple subgame-perfect Bayesian equilibria Practice Exercises 25. SCREENING Introduction Self-selection Spence education game in reverse Practice Exercises APPENDICES REFERENCES AND SUGGESTIONS FOR FURTHER READING INDEX
