MARKET 1 Lecture Notes - Lecture 2: Strategic Dominance, Best Response, Nash Equilibrium
Document Summary
Game theory = study of situations in which the payoffs of one agent depend onot only on his actions, but also. Three key elements of any game: the players, the strategies = comprise a complete plan describing how a player will act, the payoffs. Payoff matrix = payoffs for each action players can take. Simultaneous move games = games in which players pick their actions at the same time. All relevant benefits and costs of each action have to be taken into account. 1st step: put yourself in the shoes of the other player. Best response = a strategy of a player when it gives greater payoffs than any other strategies available. Dominant strategy = one best response to every possible strategy of the other player. Dominant strategy equilibrium = a combination of strategies that are all dominant strategies. Leads to an outcome that is not best for both players dilemma.
