Chapter 2
HOW TO THINK ABOUT STRATEGIC GAMES
DECISIONS VERSUS GAMES
For the interaction to become a strategic game, we need mutual awareness of what the other party does
affects you.
when each participant is significant in the interaction
➢either because each is a large player to start with
➢ or because commitments or private information narrow the scope of the relationship to a point where each
is an important player within the relationship,
we must think of the interaction as a strategic game.
1. Are the Moves in the Game Sequential or Simultaneous?
▪ In a sequential-move game, each player must think: If I do this, how will my
opponent react?
▪ With simultaneous moves, you have the trickier task of trying to figure out what
your opponent is going to do right now.
Think of examples of each game?
2. Are the Players’ Interests in Total Conflict or Is There Some Commonality?
➢Simple games such as chess or football are zero-sum games (constant-sum
games.)
➢ Most economic and social games are not zero-sum. We can have deals that
benefit everyone. Also, there can only be losers.
➢ Most games in reality have this tension between conflict and cooperation.
3. Is the Game Played Once or Repeatedly, and with the Same or Changing Opponents?
➢In one-shot encounters, each player doesn’t know much about the others;
➢You can think about a one-shot game without worrying about its repercussions on
other games you might play in the future. (EX: passing vs regular customer)
➢In games with ongoing relationships, you have an opportunity to build a reputation and
to find out more about your opponent.
➢More generally, a game may be zero-sum in the short run but have scope for mutual benefit
in the long run.
4. Do the Players Have Full or Equal Information?
➢If a game has neither external nor strategic uncertainty, we say that the game is one of
perfect information; otherwise the game has imperfect information.
➢when one player knows more than another does we have situations of incomplete or,
better, asymmetric information.
➢when different players have different information, the manipulation of information
itself becomes a game.
5. Are the Rules of the Game Fixed or Manipulable?
➢In games of business, politics, and ordinary life, the players can make their own
rules to a greater or lesser extent.
➢In such situations, the real game is the “pregame” where rules are made, and
your strategic skill must be deployed at that point.
5. Are Agreements to Cooperate Enforceable?
➢Without enforceability, agreements will stand only if it is in all participants’ individual
interests to abide by them.
➢Games in which joint-action agreements are enforceable are called cooperative Games.
➢Games in which such enforcement is not possible are called noncooperative games.
5. Are Agreements to Cooperate Enforceable?
➢Without enforceability, agreements will stand only if it is in all participants’ individual
interests to abide by them.
➢Games in which joint-action agreements are enforceable are called cooperative Games.
➢Games in which such enforcement is not possible are called noncooperative games.
Strategy
➢Strategies are simply the choices available to the players.
➢A strategy is a complete plan of action.
Payoffs
➢What is a player’s objective in a game? To win! It is not so simple.
➢We will give each player a complete numerical scale with which to compare all logically
conceivable outcomes of the game.
➢The number associated with each possible outcome will be called that player’s payoff for that
outcome.
➢If the player faces a random prospect of outcomes, then the number associated with this
prospect is the average of the payoffs associated with each component outcome.
Rationality
➢Players are perfect calculators and flawless followers of their best strategies.
This is the assumption of rational behavior.
Note: the other players calculate the consequences of their choices by using
their own value or rating system.
➢Game theory assumes that all players are rational. Although the assumption
may not be true in real world.
Common Knowledge of Rules
➢The players have a common understanding of the rules of the game.
The rules of the game consist of
(1) the list of players,
(2) the strategies available to each player
(3) the payoffs of each player for all possible combinations of strategies pursued by all the
players, and
(4) the assumption that each player is a rational maximizer.
Equilibrium
➢what happens when rational players’ strategies interact?
➢Our answer will generally be in the framework of equilibrium.