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This textbook presents worked-out exercises on game theory with detailed step-by-step explanations. While most textbooks on game theory focus on theoretical results, this book focuses on providing practical examples in which students can learn to systematically apply theoretical solution concepts to different fields of economics and business. The text initially presents games that are required in most courses at the undergraduate level and gradually advances to more challenging games appropriate for graduate level courses.
The first six chapters cover complete-information games, separately analyzing simultaneous-move and sequential-move games, with applications in industrial economics, law, and regulation. Subsequent chapters dedicate special attention to incomplete information games, such as signaling games, cheap talk games, and equilibrium refinements, emphasizing common steps and including graphical illustrations to focus students’ attention on the most relevant payoff comparisons at each point of the analysis. In addition, exercises are ranked according to their difficulty, with a letter (A-C) next to the exercise number. This allows students to pace their studies and instructors to structure their classes accordingly. By providing detailed worked-out examples, this text gives students at various levels the tools they need to apply the tenets of game theory in many fields of business and economics.
The second edition of the text has been revised to provide additional exercises at the introductory and intermediate level, expanding the scope of the book to be appropriate for upper undergraduate students looking to improve their understanding of the subject. The second edition also includes a new chapter devoted entirely to cheap talk games. Revised to appeal to a larger audience of instructors and students, this text is appropriate for introductory-to-intermediate courses in game theory at the upper undergraduate and graduate levels.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Dominance Solvable Games

Abstract
This chapter first analyzes how to represent games in normal form (using matrices) and in extensive form (using game trees). We afterwards describe how to systematically detect strictly dominated strategies, i.e., strategies that a player would not use regardless of the action chosen by his opponents.
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Chapter 2. Pure Strategy Nash Equilibrium and Simultaneous-Move Games with Complete Information

Abstract
This chapter analyzes behavior in relatively simple strategic settings: simultaneous-move games of complete information. Let us define the two building blocks of this chapter: best responses and Nash equilibrium.
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Chapter 3. Mixed Strategies, Strictly Competitive Games, and Correlated Equilibria

Abstract
This chapter analyzes how to find equilibrium behavior when players are allowed to randomize, helping us to identify mixed strategy Nash equilibria (msNE). Finding this type of equilibrium completes our analysis in Chap. 2 where we focused on Nash equilibria involving pure strategies (not allowing for randomizations).
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Chapter 4. Sequential-Move Games with Complete Information

Abstract
In this chapter we explore sequential-move games in which players observe all relevant information, and describe how to solve these games by using backward induction, which yields the set of Subgame Perfect Nash equilibria (SPNE). Intuitively, every player anticipates the optimal actions that players acting in subsequent stages will select, and chooses his actions in the current stage accordingly.
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Chapter 5. Applications to Industrial Organization

Abstract
This chapter helps us apply many of the concepts of previous chapters, dealing with simultaneous- and sequential-move games under complete information, to common industrial organization problems. In particular, we start with a systematic search for pure and mixed strategy equilibria in the Bertrand game of price competition between two symmetric firms, where we use several figures to illustrate our discussion. We then extend our explanation to settings in which firms are allowed to exhibit different costs.
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Chapter 6. Repeated Games and Correlated Equilibria

Abstract
In this chapter we explore agents’ incentives to cooperate when they interact in infinite repetitions of a stage game, such as the Prisoner’s Dilemma game or the Cournot oligopoly game. Repeated interactions between the same group of individuals, or repeated competition between the same group of firms in a given industry, are fairly common.
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Chapter 7. Simultaneous-Move Games with Incomplete Information

Abstract
This chapter introduces incomplete information in simultaneous-move games, by allowing one player to be perfectly informed about some relevant characteristic, such as the state of market demand, or its production costs; while other players cannot observe this information. In this setting, we still identify players’ best responses, but we need to condition them on the available information that every player observes when formulating its optimal strategy. Once we find the (conditional) best responses for each player, we are able to describe the Nash equilibria arising under incomplete information (the so-called Bayesian Nash equilibria, BNE) of the game; as the vector of strategies simultaneously satisfying all best responses.
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Chapter 8. Auctions

Abstract
In this chapter we examine different auction formats, such as first-, second-, third- and all-pay auctions. Auctions are a perfect setting in which to apply the Bayesian Nash Equilibrium (BNE) solution concept learned in Chap. 7, since competing bidders are informed about their private valuation for the object but are commonly uninformed about each other’s valuations. Since, in addition, bidders are asked to simultaneously submit their bids under an incomplete information environment; we can use BNE to identify equilibrium behavior, namely, equilibrium bidding strategies.
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Chapter 9. Perfect Bayesian Equilibrium and Signaling Games

Abstract
This chapter examines again contexts of incomplete information but in sequential move games. Unlike simultaneous-move settings, sequential moves allow for players’ actions to convey or conceal the information they privately observe to players acting in subsequent stages and who did not have access to such information (uninformed players). That is, we explore the possibility that players’ actions may signal certain information to other players acting latter on in the game.
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Chapter 10. Cheap Talk Games

Abstract
This chapter analyzes a special class of signaling games where the sender faces costless messages. We examine whether separating PBEs can be sustained, where information is conveyed from the privately informed sender to the uninformed receiver; and whether pooling PBEs can be supported, where the sender conceals his private information from the receiver. We show that information transmission can occur (that is, a separating PBE can be sustained) if the preferences of sender and receiver are sufficiently aligned; otherwise no information transmission exists between the parties.
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Chapter 11. More Advanced Signaling Games

Abstract
The final chapter presents extensions and variations of signaling games, thus providing more practice about how to find the set of PBEs in incomplete information settings. We first study a poker game where, rather than having only one player being privately informed about his cards (as in Chap. 8), both players are privately informed. In this context, the first mover’s actions can reveal information about his cards to the second mover, thus affecting the latter’s incentives to bet or fold relative to a context of complete information.
Felix Munoz-Garcia, Daniel Toro-Gonzalez

Correction to: Strategy and Game Theory

Felix Munoz-Garcia, Daniel Toro-Gonzalez

Backmatter

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