Strategies for Studying Games of Strategy

1
Strategies for Studying Games of Strategy

• Two general approaches
• Case-based
• Pro Relevance, connection of theory to
  application
• Con Generality
• Theory
• Pro General principle is clear
• Con Applying it may not be

2
Approach of this course

• Intermediate between theory and cases
• Lectures organized around a single general
  principle.
• Illustrated with cases and experiments
• Cases are stripped down to essentials
• Constant reality checks
• When does theory work?
• When doesnt it?
• Why doesnt it?

3
Some Background Common to All Games

• Games versus Decisions
• Nature is not a strategic player
• Individual decisions might still be games if
  there are control problems with future self
• Large versus Small Numbers
• Games typically thought to pertain to small
  numbers of players
• But large markets can become small
• Bilateral contracting/holdup problems
• Information/signaling market for venture capital

4
Classifying Games

• Sequential v simultaneous
• Improving a product/ Developing a new product
• Conflict v coordination
• Circuit City and Best Buy/ United Nations
• One-shot v repeated
• Buying a car/ Grocery Shopping
• Public v private information
• Grocery Shopping / Buying a house
• Fixed v manipulable rules
• Buying things / Government and citizens
• Enforceable v unenforceable cooperative
  agreements
• Labor Contracts / Cold War

5
Terminology

• Strategies
• Choices available to each of the players
• Instructions to a machine
• Payoffs
• Some numerical representation of the objectives
  of each player
• Could take account fairness/reputation, etc.
• Does not mean players are narrowly selfish

6
Standard Assumptions

• Rationality
• Players are perfect calculators and implementers
  of their desired strategy
• Common knowledge of rules
• All players know the game being played
• Equilibrium
• Players play strategies that are mutual best
  responses

7
The Uses of Game Theory

• Explanatory
• A lens through which to view and learn from past
  negotiations/conflicts
• Predictive
• With many caveats
• Prescriptive
• The main thing youll take out of the course is
  an ability to think strategically