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Introduction to Game Theory

Roman Sheremeta, Ph.D.

Professor, Weatherhead School of Management

Case Western Reserve University

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Outline�

  • Two people you should know
  • What is a game
  • What is game theory
  • Examples

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People you should know�

  • John F. Nash (1994 Nobel Memorial Prize in Economics, “Beautiful Mind”)

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People you should know�

  • Vernon L. Smith (2002 Nobel Memorial Prize in Economics)

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What is a game?�

  • A situation where a group of people is affected by the choices made by other individuals within that group

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  • We focus on games where:
    • There are at least two rational players
    • Each player has at least one choice
    • There is strategic interaction (the outcome depends on the strategies chosen by all players)

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What is a game?�

  • Most games involve chance, skill, and strategy in varying proportions

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  • Strategy:
    • What is the best action to take?
    • Example: A strategy is a part of the mental skill needed to play well, and it is the calculation of how best to use your physical skill in the context of sports

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Example: Tennis�

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crosscourt

down-the-line

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What is a game?�

  • Some questions:
    • What will each player guess about others’ choices?
    • What action will each player take?
    • What is the outcome of these actions?
    • Is this outcome good for the entire group as a whole?
    • Does it make a difference if players interacts more than once?
    • How to behave when players are unsure about the characteristics of others?
    • What is “the best strategy”?

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What is not a game?�

  • A situation where your decisions affect no one but yourself
    • Should I go to see a movie or stay home and study?
    • Where should I eat dinner tonight?

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  • A situation where your decisions do affect others, but there are so many people involved that it is neither feasible nor sensible to keep track of what each one does
    • Perfect competition
    • Voting

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Why do economists study games?�

  • Games are a convenient way to model the strategic interactions among economic agents:
    • Trade: Levels of imports, exports, prices depend on tariffs of other countries
    • Labor: Your chance of receiving a promotion depends not only on your effort but also on efforts of others
    • Industrial organization: Price strategy depends not only on your output but also on the output of your competitor
    • Public goods: My benefits from contributing to a public good depend on what everyone else contributes

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Why do others study games?�

  • Game theory is not limited to Economics:
    • Political science: Elections, voting, conflicts, wars
    • Computer science: Multi-agent systems, algorithms
    • Sports: NFL, NBA
    • Law: Arbitration, litigation
    • Biology: Animals fighting for dominance
    • T.V. game shows: “Price is Right”, Jeopardy
    • Games: Chess, Checkers, Risk

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What is game theory?�

  • Game theory:
    • The science of rational behavior in interactive situations
    • Provides general principles for thinking about strategic interactions

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Examples�

  • Common examples:
    • Prisoner’s dilemma
    • The battle of the sexes
    • Chicken
    • Matching pennies
    • Cournot model of duopoly
    • Tournaments

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Thank you!

Roman Sheremeta, Ph.D.

Professor, Weatherhead School of Management

Case Western Reserve University

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References�

  • Watson, J. (2013). Strategy: An Introduction to Game Theory (3rd Edition). Publisher: W. W. Norton & Company. (Chapter 1)

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