Ebook Advanced microeconomic theory (3rd edition): Part 2
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Ebook Advanced microeconomic theory (3rd edition): Part 2
WWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2tiate a trade deal, what will be the outcome? What strategies will be followed by a number of oil companies each bidding on an offshore oil tract in a sealed-bid auction?In situations such as these, the actions any one agent may take Will have consequences for others. Because of this, agents have re Ebook Advanced microeconomic theory (3rd edition): Part 2ason to act strategically. Gaine theory is the systematic study of how rational agents behave in strategic situations, or in games. where each agent mEbook Advanced microeconomic theory (3rd edition): Part 2
ust first know the decision of the other agents before knowing which decision is best for himself. This circularity IS the hallmark of the theory of gWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2m games and proceeds to consider extensive form games in some detail. The former are games in which the agents make a single, simultaneous choice, whereas the latter are games in which players may make choices in sequence.Along the way, we will encounter a variety of methods for determining the outc Ebook Advanced microeconomic theory (3rd edition): Part 2ome of a game. You will see that each method we encounter gives rise to a particular solution concept. The solution concepts we will study include thoEbook Advanced microeconomic theory (3rd edition): Part 2
se based on dominance arguments. Nash equilibrium. Bayesian-Nash equilibrium, backward induction, subgame perfection, and sequential equilibrium. EachWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2rt of being a good applied economist.7.1 Strategic Decision MakingThe essential difference between strategic and non-strategic decisions is that the latter can be made in 'isolation*, without taking into account the decisions that others might make. For example, the theory of the consumer developed Ebook Advanced microeconomic theory (3rd edition): Part 2in Chapter 1 is a model of non-strategic behaviour. Given prices and income, each consumer acts entirely on his own, without regard for the behaviourEbook Advanced microeconomic theory (3rd edition): Part 2
of others. On the other hand, the Cournot and Bertrand models of duopoly introduced in Chapter 4 capture strategic decision making on the partwww.downWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2 illustrate the significance of strategic decision making consider the classic duel between a batter and a pitcher in baseball. To keep things simple, let US assume that the pitcher has only two possible pitches - a fastball and a curve. Also, suppose it is well known that this pitcher has the best Ebook Advanced microeconomic theory (3rd edition): Part 2fastball in the league, but his curve is only average. Based on this, it might seem best for the pitcher to always throw his fastball. However, such aEbook Advanced microeconomic theory (3rd edition): Part 2
non-strategic decision on the pitcher’s part fails to take into account the batter’s decision. For if the batter expects the pitcher to throw a fastbWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2pitcher's pitch before deciding which pitch to throw.To push the analysis a little further, let US assign some utility numbers to the various outcomes. For simplicity, we suppose that the situation is an all or nothing one for both players. Think of it as being the bottom of the ninth inning, with a Ebook Advanced microeconomic theory (3rd edition): Part 2 full count, bases loaded, two outs, and the pitcher's team ahead by one run. Assume also that the batter either hits a home run (and wins the game) oEbook Advanced microeconomic theory (3rd edition): Part 2
r strikes out (and loses the game). Consequently, there is exactly one pitch remaining in the game. Finally, suppose each player derives utility 1 froWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2e row. F (fastball) or c (curve), and the batter (B) chooses the column. The batter hits a home run when he prepares for the pitch that the pitcher has chosen, and strikes out otherwise. The entries in the matrix denote the players' payoffs as a result of their decisions, with the pitcher's payoff b Ebook Advanced microeconomic theory (3rd edition): Part 2eing the first number of each entry and the batter’s (he second. Thus, the entry (1. -1) in the first row and second column indicates that if the pitcEbook Advanced microeconomic theory (3rd edition): Part 2
her throws a fastball and the batter prepares for a curve, (he pitcher’s payoff is 1 and the batter’s is -1. The other entries are read in (he same waWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2 decide on which pitch to throw, the batter must decide on which pitch to prepare for. What can be said about their behaviour in such a setting? Even though you might be able to provide the answer for yourself already, we will not analyse this game fully just yet.However, we can immediately draw a r Ebook Advanced microeconomic theory (3rd edition): Part 2ather important conclusion based solely on the ideas that each player seeks to maximise his payoff, and that each reasons strategically.BatterFPitcherEbook Advanced microeconomic theory (3rd edition): Part 2
cF c-1.11, -11. -1-1.1Figure 7.1. The batter-pitcher game.www.downloadslide.comGAME THEORY307Here, each player must behave in a manner that is •unpreWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2ld be guaranteed to hit a home run and win the game. But this would mean that the batter's behaviour is predictable as well; he always prepares for a fastball. Consequently, because the pitcher behaves strategically, he will optimally choose to throw his curve, thereby striking the batter out and wi Ebook Advanced microeconomic theory (3rd edition): Part 2nning the game. But this contradicts our original supposition that the pitcher always throws his fastball! We conclude that die pitcher cannot be corrEbook Advanced microeconomic theory (3rd edition): Part 2
ectly predicted to always throw a fastball. Similarly, it must be incorrect to predict that the pitcher always throws a curve. Thus, whatever behaviouWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2 same reasons, it must also involve a lack of predictability regarding the batter's choice of which pitch to prepare for.Thus, when rational individuals make decisions strategically, each taking into account the decision the other makes, they sometimes behave in an ‘unpredictable’ manner. Any good p Ebook Advanced microeconomic theory (3rd edition): Part 2oker player understands this well it is an essential aspect of successful bluffing. Note, however, that there is no such advantage in non-strategic seEbook Advanced microeconomic theory (3rd edition): Part 2
ttings when you are alone, there is no one to 'fool*. This is but one example of how outcomes among strategic decision makers may differ quite signifiWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2.7.2 Strategic Form GamesThe batter-pitcher duel, as well as Cournot and Bertrand duopoly, are but three examples of the kinds of strategic situations economists wish to analyse. Other examples include bargaining between a labour union and a firm, trade wars between two countries, research-and-dcvcl Ebook Advanced microeconomic theory (3rd edition): Part 2opmcnl races between companies, and so on. We seek a single framework capable of capturing the essential features of each of these sellings and more.Ebook Advanced microeconomic theory (3rd edition): Part 2
Thus, we must search for elements that are common among them. What features do these examples share? Well, each involves a number of participants we sWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negot Ebook Advanced microeconomic theory (3rd edition): Part 2rives one payoff or another depending on his own strategy choice as well as the strategies chosen by each of the other players. As has been the tradition, we shall refer to such a situation as a game, even though the stakes may be quite serious indeed, with this in mind, consider the following defin Ebook Advanced microeconomic theory (3rd edition): Part 2ition.DEFINITION 7.1 Strategic Form GameA strategic form game is a tuple G — (Si.where for each player I = 1....Ar. Si isthe set of strategies availabEbook Advanced microeconomic theory (3rd edition): Part 2
le to player i, andut: xỳ' ị .S'; -> R describes play er j’s payoffas a function of the strategies chosen by all players. A strategic form game is finWWW downloadslide comChapter 7Game TheoryWhen a consumer goes shopping for a new car, how will he bargain with the salesperson? If two countries negotGọi ngay
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