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Chapter 5

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University of Toronto Mississauga
Yasin Janjua

stEco205Chapter 5Game Theory 1 April 2013 Pages 175186Cooperative game theoryassumes the group of players reaches an outcome that is best for the group as a whole producing the largest pie to be shared among them the theory focuses on rules for how the pie should be divided Noncooperative game theoryis where players are guided instead by self interestBasic Concepts Any strategic situation can be modeled as game by specifying four basic elements 1 players 2 strategies 3 payoffs and 4 information A strategy can be a contingent plan of action based on what another player does first A strategy can involve a random selection from several possible actions The actions underlying the strategies can range from the very simple to the very complex Even when the player has only two actions available the set of strategies may be much larger once we allow for contingent plans or for probabilities of playing the actions The returns to the players at the conclusion of the game are called payoffs Payoffs include the utilities players obtain from explicit monetary payments plus any implicit feelings they have about the outcome This is sometimes a reasonable assumption but it should be recognized as a simplification Players seek to earn the highest payoffs possible In simultaneousmove games neither player knows the others action when moving In sequential move games the first mover does not know the seconds action but the second mover knows what the first did In some games called games of incomplete information players may have an opportunity to learn things that others dont know EquilibriumBest responseA strategy that produces the highest payoff among all possible strategies for a player given what the other player is doing Player As strategy a is a best resp
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