From the popular series “Numb3rs” you may know the term “Game Theory”, but do you actually know what this is and how it works? During a six-week session of microeconomics, several basic principles are introduced and applied in the business context. Game Theory deals with the optimal behavior of rational decision makers in a simplified surrounding. This text deals with the optimal behavior during a second price action and within oligopolistic competition. The basic ideas like the prisoner's dilemma are explained and underlined with real examples to simplify and illustrate the dry mathematics behind it. After reading this text, you will be able to solve certain problems in a simplified surrounding by your own and will perceive the world at least a little bit more rational.
Table of Contents
1. Introduction into Game Theory
2. Static Games with discrete payoffs (simultaneous actions)
3. Specifics on Nash equilibrium
4. Static Games with continuous payoffs
5. Zero-sum games and mixed strategies
6. Sequential Games (actions are followed by each other)
7. Sequential game with continuous actions
8. Apply the foundations of game theory in a practical example
9. Oligopolistic competition
10. General information about the market
11. Famous market types explained with examples
12. Timing of strategic decisions
13. Strategic Variables
14. Strategic interactions can be distinguished by strategic variables and timing
15. Bertrand Paradox
16. Cournot Competition
17. Inverse demand and total welfare
18. N-firm Cournot Oligopoly
19. Cournot-Stackelberg model
20. Bertrand Stackelberg with differentiated products
21. Summary of the four models
22. Asymmetric Information and Market Failure
23. Hidden Information – The Market for Used Cars
24. Further examples for adverse selection
25. Hidden Action
26. Modeling the right contract
27. Externalities – The Heating Game
28. Government instruments of internalizing externalities
29. Comparing the legal limit with the pigouvian tax
30. Tradeable emission allowances
31. The Coase Theorem
32. Public Goods
33. Summary of externalities and public goods
34. Pure Exchange Economy
35. Welfare functions to determine whether a distribution is “good” or not
36. Competitive Equilibrium
37. First Fundamental Theorem of Welfare Economics
38. Second Fundamental Theorem of Welfare Economics
39. Summary of Competitive Equilibrium
Objectives and Topics
The primary objective of this text is to introduce foundational principles of microeconomics and game theory, specifically focusing on the strategic behavior of rational decision-makers in business contexts. The work aims to equip readers with the analytical tools to solve problems in simplified environments, covering topics such as oligopolistic competition, information asymmetry, and market failures.
- Strategic interaction and Nash equilibrium in various market settings.
- Continuous and discrete payoff games, including Cournot and Bertrand competition.
- Analysis of asymmetric information, covering adverse selection and moral hazard.
- Externalities, public goods, and the role of government intervention.
- Foundations of welfare economics and competitive equilibrium.
Excerpt from the Book
The original construction around the prisoner's dilemma.
Police arrested two suspects in a serious crime, but only can prove a small crime. Interrogate both simultaneously separated from each other and both will confess doing the crime together with the partner. => Both will receive the highest penalty because of strong incentive to confess.
Summary of Chapters
1. Introduction into Game Theory: Provides a high-level overview of the scope and application of game theory in microeconomics.
2. Static Games with discrete payoffs (simultaneous actions): Introduces basic game concepts like players, rules, and payoff matrices using the prisoner's dilemma.
3. Specifics on Nash equilibrium: Discusses the criteria for Nash equilibria and the implications when multiple equilibria exist.
4. Static Games with continuous payoffs: Extends the concept of games to continuous variables, using the profit function and first-order conditions.
5. Zero-sum games and mixed strategies: Examines scenarios where interests are directly conflicting, leading to mixed strategy solutions.
6. Sequential Games (actions are followed by each other): Explores games where timing matters, introducing the extensive form representation and subgame perfect equilibria.
7. Sequential game with continuous actions: Analyzes multi-stage games with continuous variables, such as advertising budgets.
8. Apply the foundations of game theory in a practical example: Illustrates the mechanics of a Second Price Auction.
9. Oligopolistic competition: Explains market structures where companies hold significant market power.
10. General information about the market: Outlines demand and supply dynamics in oligopolistic environments.
11. Famous market types explained with examples: Categorizes market structures like monopoly and perfect competition.
12. Timing of strategic decisions: Differentiates between simultaneous, sequential, and repeated strategic moves.
13. Strategic Variables: Identifies variables like price, quantity, and product differentiation as focal points of competition.
14. Strategic interactions can be distinguished by strategic variables and timing: Maps market interactions based on chosen variables and move sequences.
15. Bertrand Paradox: Discusses the counter-intuitive result where intense competition leads to outcomes identical to perfect competition.
16. Cournot Competition: Focuses on market competition where firms compete on quantities rather than prices.
17. Inverse demand and total welfare: Analyzes the calculation of producer and consumer surpluses.
18. N-firm Cournot Oligopoly: Generalizes the Cournot model to account for the impact of the number of firms in a market.
19. Cournot-Stackelberg model: Examines a market with a leader-follower dynamic.
20. Bertrand Stackelberg with differentiated products: Investigates price competition in non-homogeneous product markets.
21. Summary of the four models: Provides a concluding comparison of the discussed oligopoly methodologies.
22. Asymmetric Information and Market Failure: Introduces concepts of hidden information and hidden action.
23. Hidden Information – The Market for Used Cars: Explores adverse selection through the classic Akerlof-style car market example.
24. Further examples for adverse selection: Applies information asymmetry concepts to insurance and credit markets.
25. Hidden Action: Analyzes the principal-agent problem and the challenge of moral hazard.
26. Modeling the right contract: Discusses the trade-off between insurance and performance incentives for agents.
27. Externalities – The Heating Game: Uses a multi-flat building example to illustrate negative externalities.
28. Government instruments of internalizing externalities: Reviews policy tools like taxes and legal limits.
29. Comparing the legal limit with the pigouvian tax: Evaluates the relative efficiency of different regulatory instruments.
30. Tradeable emission allowances: Explains market-based mechanisms for pollution control.
31. The Coase Theorem: Discusses the role of property rights in resolving externalities.
32. Public Goods: Defines public goods by rivalry and excludability, and explains associated market failures.
33. Summary of externalities and public goods: Recaps the justification for government intervention in the presence of market failures.
34. Pure Exchange Economy: Uses an Edgeworth box to illustrate efficient allocation between two consumers.
35. Welfare functions to determine whether a distribution is “good” or not: Presents utilitarian and Rawlsian perspectives on social welfare.
36. Competitive Equilibrium: Defines the state of market clearing and price-taking behavior.
37. First Fundamental Theorem of Welfare Economics: Asserts the Pareto efficiency of competitive equilibria.
38. Second Fundamental Theorem of Welfare Economics: Discusses how redistribution can achieve different fair outcomes.
39. Summary of Competitive Equilibrium: Concludes the importance of competitive markets in achieving efficient outcomes.
Keywords
Game Theory, Nash Equilibrium, Oligopoly, Cournot Competition, Bertrand Competition, Asymmetric Information, Adverse Selection, Moral Hazard, Principal-Agent Problem, Externalities, Public Goods, Coase Theorem, Welfare Economics, Pareto Efficiency, Market Failure
Frequently Asked Questions
What is the fundamental focus of this text?
The text provides a comprehensive introduction to microeconomic theory and game theory, focusing on how rational decision-makers act strategically in simplified business environments.
What are the central thematic fields covered?
The main themes include strategic interaction, oligopolistic market competition, the impact of information asymmetry, market externalities, and the foundations of welfare economics.
What is the primary goal of the author?
The goal is to enable readers to solve basic economic problems by understanding the mathematics and logic behind rational strategic behavior in competitive markets.
Which scientific methods are primarily employed?
The text utilizes formal models, including game-theoretic frameworks, payoff matrices, decision trees, Lagrangian optimization for contracts, and welfare analysis through Edgeworth boxes.
What topics are discussed in the main part of the work?
The main part covers static and sequential games, different competition models (Bertrand/Cournot), the challenges of adverse selection and moral hazard, and the correction of market failures.
Which keywords best characterize the work?
Key terms include Game Theory, Nash Equilibrium, Oligopoly, Asymmetric Information, Externalities, Public Goods, and Pareto Efficiency.
How does the text distinguish between hidden information and hidden action?
Hidden information relates to ex-ante issues where one party has more knowledge (e.g., used car quality), while hidden action relates to ex-post moral hazard, where a principal cannot perfectly observe an agent's effort.
What is the significance of the "Coase Theorem" mentioned in the text?
The Coase Theorem highlights that when property rights are clearly defined and transaction costs are absent, private parties can bargain to reach an efficient outcome regarding externalities, regardless of the initial allocation of rights.
How does the Cournot model differ from the Bertrand model?
In the Cournot model, firms compete by choosing quantities, while in the Bertrand model, firms compete by setting prices.
- Quote paper
- Mike G. (Author), 2017, Introduction into Game Theory (Business Context), Munich, GRIN Verlag, https://www.hausarbeiten.de/document/366933
