The Principles of Game Theory

This chapter recalls the main principles of non-cooperative game theory and especially its main equilibrium concepts. It proceeds by progressively introducing more and more complexity into the basic interaction model between rational players. The basic model is static with complete and perfect information and introduces the concept of Nash equilibrium as a fixed point of players’ best responses. Then, sequential action is explicitly introduced and leads to the concept of subgame perfect equilibrium, usually obtained by a backward induction procedure. Coming back to a static framework, structural uncertainty is embedded in the Bayesian equilibrium concept, where beliefs about others’ types are confirmed. Finally, combining temporality and factual uncertainty, one obtains the Bayesian Nash equilibrium concept, grounded on a fixed point between players’ beliefs about others’ past moves and their own future actions.