Introduction to Game Theory Course Outline

1. Introduction to Game Theory

● Definition: Game theory is the study of strategic interactions where the outcome for
each participant depends on the actions of all involved.
● Applications of Game Theory: Economics, political science, biology, psychology,
business, and everyday decision-making.
● Types of Games:
○ Cooperative vs. Non-cooperative: Whether players can form binding
commitments (cooperative) or not (non-cooperative).
○ Zero-sum vs. Non-zero-sum: Zero-sum games have one player's gain exactly
matching another's loss, while non-zero-sum games allow for mutual gains or
losses.
○ Simultaneous vs. Sequential: Players choose their actions at the same time
(simultaneous) or in turn (sequential).

2. Basic Concepts in Game Theory

● Players: Individuals or entities making decisions in the game.

● Strategies: Plans of action or decisions that players can make.
○ Pure Strategies: A strategy where a player chooses one specific action.
○ Mixed Strategies: A strategy where a player randomizes over possible actions.
● Payoffs: The outcomes of the game, often represented as rewards or utilities.
● Nash Equilibrium:
○ Definition: A situation where no player can unilaterally change their strategy to
improve their payoff, given the strategies of others.
○ Existence: Nash equilibria exist in every finite game, though there may be
multiple or none in pure strategies.

3. Representing Games

● Normal Form (Strategic Form):

○ A matrix or table representing the strategies and payoffs for all players in a
simultaneous game.
○ Example: Prisoner’s Dilemma, where players’ choices of "Cooperate" or "Defect"
lead to different payoffs.
● Extensive Form:
○ A tree diagram representing sequential moves, showing the order of decisions,
possible actions, and outcomes.
○ Used for analyzing dynamic games and decisions made over time.
 4. Dominant and Dominated Strategies

● Dominant Strategy: A strategy that results in a higher payoff for a player regardless of
the strategies chosen by others.
● Dominated Strategy: A strategy that always results in a lower payoff than some other
strategy, regardless of what others choose.
● Iterated Elimination of Dominated Strategies: A method for simplifying games by
sequentially eliminating dominated strategies to find possible equilibria.

5. Mixed Strategies and Nash Equilibrium

● Mixed Strategies: A strategy where a player randomizes over different actions with
specific probabilities.
● Mixed Strategy Nash Equilibrium: A Nash equilibrium where at least one player is
using a mixed strategy.
● Finding Mixed Strategy Equilibria: Calculating the probability distributions over
strategies that make each player indifferent to the strategies of others.

6. Games of Complete and Incomplete Information

● Complete Information: All players know the payoffs and strategies available to all other
players.
● Incomplete Information: Players are unsure about some aspect of the game, such as
payoffs or available strategies.
○ Bayesian Games: Games where players have beliefs about the unknown
aspects and these beliefs are incorporated into decision-making.

7. Sequential Games and Subgame Perfection

● Sequential Games: Games where players make decisions in a specific order.

● Backward Induction: A method for solving sequential games by analyzing from the last
decision to the first.
● Subgame Perfect Equilibrium (SPE): A refinement of Nash equilibrium applicable to
dynamic games, where players’ strategies constitute a Nash equilibrium in every
subgame.

8. Repeated Games

● Finite Repeated Games: Games that are played a fixed number of times.
○ Example: Repeated Prisoner’s Dilemma where players interact multiple times.
● Infinitely Repeated Games: Games that are played an indefinite number of times.
 ○ Folk Theorem: In infinitely repeated games, a wide variety of outcomes,
including cooperation, can be sustained as equilibria.

9. Cooperation and the Prisoner's Dilemma

● The Prisoner’s Dilemma:

○ A classic example of non-cooperative game theory where mutual cooperation
yields a better outcome than mutual defection, but players tend to defect due to
self-interest.
● Incentives for Cooperation: In repeated or evolutionary games, cooperation may
emerge through mechanisms like tit-for-tat strategies.

10. Evolutionary Game Theory

● Basics: Studies how strategies evolve over time based on their success in the
population.
● Evolutionarily Stable Strategy (ESS): A strategy that, if adopted by a population,
cannot be invaded by an alternative strategy because it yields a higher fitness.
● Applications: Used to explain behavior in biology, economics, and social interactions.

11. Bargaining and Negotiation

● Bargaining Games: Games in which two or more players must agree on how to divide a
resource or surplus.
● Nash Bargaining Solution: A solution concept where players maximize the product of
their utilities, reflecting fairness in bargaining.
● Alternating Offers Model: A dynamic model of bargaining where players take turns
making offers, with payoffs decreasing over time.

12. Cooperative Games

● Coalitional Games: Games where groups of players (coalitions) can form and share
payoffs.
● Core: The set of possible outcomes where no coalition can do better by breaking away
from the grand coalition.
● Shapley Value: A method for distributing payoffs fairly among players based on their
contributions to different coalitions.

13. Auctions and Mechanism Design

● Types of Auctions:
 ○ First-price sealed-bid auction: Bidders submit bids in secret, and the highest
bidder wins and pays their bid.
○ Second-price sealed-bid auction (Vickrey auction): The highest bidder wins
but pays the second-highest bid.
○ English auction: Bidders openly raise bids until no higher bids are made.
● Revenue Equivalence Theorem: Under certain conditions, all standard auction formats
yield the same expected revenue for the seller.
● Mechanism Design: The field of game theory concerned with designing rules or
systems to achieve specific outcomes, especially in situations of asymmetric information.

14. Behavioral Game Theory

● Bounded Rationality: The idea that players do not always act fully rationally due to
cognitive limitations and biases.
● Prospect Theory: Players weigh losses more heavily than gains, affecting their
decisions in strategic interactions.
● Fairness and Reciprocity: Players often consider fairness, not just self-interest, in
making decisions.

15. Applications of Game Theory

● Economics: Market competition, auctions, pricing strategies.

● Political Science: Voting systems, coalition formation, and conflict resolution.
● Biology: Evolution of cooperation, animal behavior, and natural selection.
● Business Strategy: Competitive strategies, negotiations, and contract design.
● Social and Psychological Applications: Analysis of human behavior, altruism, and
group dynamics.