EC 252 (WI22): Chapter 18 by Erica Orians https://padlet.com/ericaorians/nzv31ygysq38sakp Template en-us 2022-03-11 14:10:54 UTC 2025-09-25 03:43:08 UTC hello@padlet.com Chapter 18 ericaorians https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2090503388 2022-03-11 14:10:54 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2090503388 Instructions: View instructions on the section padlet. ericaorians https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2090503389 2022-03-11 14:10:54 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2090503389 Team: Students will do one chapter per section. View your assigned padlet at this link. ericaorians https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2090503390 2022-03-11 14:10:54 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2090503390 Game Theory Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126195534 Game theory is the science of making good decisions in situations involving strategic interactions. Game theory gets its name from the observation that the same notions that inform how you might box or play a strategic game like chess, can also be applied to your business strategies. Game theory is particularly useful in the sort of high-stakes strategic interactions that often arise in oligopolies]]> 2022-04-02 02:20:21 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126195534 Strategic Interactions Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126197388 When your best choice may depend on what others choose, and their best choice may depend on what you choose.Your best choice might depend as much on the choices made by your allies as your opponents, and hence this notion of strategic interactions encompasses collaboration as much as competition. 

Business decisions are strategic interactions because the payoff to, say, cutting your prices, depends on whether your competitors respond with a similar price cut. Likewise, your decision on how best to position your product is a strategic interaction because the profitability of targeting a particular market segment depends on how your competitors position their products. And your decision to enter a new market involves a strategic interaction, because your profitability depends on whether the incumbent firms will respond with a price war. Strategic interactions include partners as well as rivals, and the profitability of a new investment might depend on how much your partners invest in the project.

There are strategic interactions between both political rivals and political allies, because the payoff from voting for a bill depends on whether others vote for it, too. In elections you might choose to vote only if other voters are likely to make it a close election. There are also weighty strategic interactions when countries decide to get involved in an arms race or amass troops near the border.

Strategic interactions also occur among friends. These interactions highlight that sometimes strategy is more about cooperation and coordination rather than competition. 


]]> 2022-04-02 02:24:17 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126197388 Four Steps for Making Good Strategic Decisions Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126200287 1) Consider all the possible outcomes
To make an informed choice, you’ll need to consider all the different outcomes that could occur. This means considering every combination of choices that both you and other players might make. This can be done using a payoff table.
2) Think about the "what if's" separately
Break the problem into its simpler components, which are the various choices that the other person could make. Think in terms of “what ifs?” and write down each “what if?” separately. When you think about these separately, you get two far simpler problems. You’ll then proceed to the next step.
3) Play your best response
For each “what if?” your goal should be to play your best response—the choice that yields the highest possible payoff for you, given the other player’s choice. When you find your best response, put a check mark next to it. This check mark will help you remember your best response.
4) Put yourself in someone else's shoes 
In every strategic interaction your outcomes depend on the choices that other people make. This means that you cannot figure out your best choice without first trying to figure out the choices that others will make. Put yourself in someone else’s shoes in order to figure out what decision you would make if you faced their incentives.]]> 2022-04-02 02:29:56 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126200287 A Payoff Table Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126202353 A table that lists your choices in each row, the other player’s choices in each column, and so shows all possible outcomes, listing the payoffs in each cell. This tables describes the different payoffs in words. In most cases though, numbers such as grades, business profits, or some other measure of each payoff is used. When you find the best response, put a check man next to each one. The Nash equilibrium, when each player has played their best response to the choices of other player, is the outcome with a check mark from each player. In this case, the Nash equilibrium occurs when Pepsi and Coke both defect. This example specifically demonstrates the Prisoner's Dilemma. ]]> 2022-04-02 02:33:55 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126202353 Nash Equilibrium Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126215285 An equilibrium in which the choice that each player makes is a best response to the choices other players are making. It’s an equilibrium because no one can do better by changing their choice alone. When using the a payoff table and the checkmark method(putting a check next to each player's best response), look for an outcome with two check marks to find the Nash equilibrium. 

Notice that in a Nash equilibrium two thing are true:
  • Best responses: Each player's choice is their best response to what they expect the other to choose. 
  • Correct expectations: Each player's expectation about what the other player will choose is also correct. 
]]> 2022-04-02 02:58:25 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126215285 The Prisoner's Dilemma Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126231225 When two individuals acting in their own self-interests do not produce the optimal outcome for both parties. In the Pepsi/Coke scenario, the problem is that neither can credibly commit to cooperating, and so neither expects the other to actually cooperate, and this makes defecting the best response. 

The Prisoner’s Dilemma is best read as a parable. In particular, the big insight is that people often fail to cooperate even when there’s a project that could make them all better off. Even though the benefits of cooperation exceed the benefits of defecting in the Prisoner’s Dilemma, defecting to take advantage of a cooperative rival yields an even bigger and more tempting payoff. That temptation can cause cooperation to fail. 

These interactions can lead people to make strategic choices that lead to inefficient outcomes. And so in a world full of strategic interactions, there’s no reason to assume that free markets will yield good outcomes.]]> 2022-04-02 03:32:37 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126231225 Multiple Equilibria Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126234184 When there is more than one equilibrium. For instance, a call between two parties is dropped. Should party one call back and party two wait for the call? Or should party two call back and party one wait? Both scenarios are equilibriums. ]]> 2022-04-02 03:38:55 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126234184 Coordination Game Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126240297 When all players have a common interest in coordinating their choices. The problem is that coordination is difficult when there’s more than one equilibrium. Scenarios involving coordination games include phone tag(who calls back and who wait for the call?); the adoption of new technology(you and your friends want gaming systems to play together. Xbox or Playstation?); coordinating business(customers want to shop when stores are open, stores want to open when customers want to shop); political revolutions and protests(Should you and others protest or not?); and relationships(should we remain friends or become romantic?)]]> 2022-04-02 03:53:50 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126240297 Anti-Coordination Games Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126240956 When your best response is to take a different (but complementary) action to the other player. Phone tag can be thought of as an anti-coordination game in the sense that party one wants to call party two if they're waiting, or vice versa. Similarly, market entry can be thought of the same way: Will you enter this new market or will I? If we both enter, we'll compete and yield losses. If we both don't enter, neither of us will make profits at all. One should enter and the other should not. Other examples include traffic games(if everyone takes the highway or backroads, traffic jams occur. Some taking backroads and some taking the high results in a smooth trip); bargaining dynamic(if you and your both are both aggressive or passive, a subpar deal could be made or it could fail altogether). ]]> 2022-04-02 03:55:32 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126240956 Good and Bad Equilibria Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126250126 The problem posed by multiple equilibria is complicated further when considering there are situations in which there's a good and bad equilibrium, and the bad equilibrium is worse for everyone. For instance, When you give your savings to the bank, they don’t just store it in a vault, instead they lend a lot of it out. This means that if too many people want to withdraw their savings at the same time, the vault will quickly empty, and people at the back of the line won’t get paid. In the good equilibrium, the banking system works perfectly: All savers are happy keeping their money in the bank earning interest, because that is a best response for each of them when everyone else also keeps their money in the bank.

But there’s also a bad equilibrium, which corresponds to a bank run: If you believe that many other people are going to withdraw their money, your best response is to run to the bank to withdraw your savings, before the vault empties. A bank run occurs because everyone tries to withdraw their money before everyone else, and this is a best response for each of them given that everyone else is trying to withdraw their money. This type of bank run leads the bank to collapse and can catalyze a broader economic disaster.
]]> 2022-04-02 04:19:55 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126250126 Solving Coordination Problems Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126255072 Three solutions to coordination problems: 
  • Communication. 
Communicating the desired equilibrium before the game can help to coordinate. But in many other strategic games, players have opposing incentives, so communication won’t work because you’re suspicious that the other player may be trying to fool you, much as we saw in the Prisoner’s Dilemma.
  • Focal points, culture, and norms. 
Sometimes, we figure out how to coordinate our actions by just thinking about what seems most natural. Players rely on focal points(a cue from outside the game) to help coordinate on a particular equilibrium. Social conventions and norms provide common focal points. For instance, it is the norm in the US to eat lunch around noon, which can indicate a good time to meet a friend for lunch. 
  • Laws and regulations. 
When focal points and social conventions don’t naturally arise, then there’s a natural role for government laws and regulations to help enforce coordination. To take a simple example, if other people drive on the left-hand side of the road, then your best response is also to drive on the left. But if they drive on the right-hand side, then your best response is also to drive on the right. So should you drive on the left- or the right-hand side of the road?

Either works, it’s just important that we all choose the same one. And so this is why we have traffic laws.
]]> 2022-04-02 04:34:45 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126255072 First-Move Advantage Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126500433 The strategic gain from an anticipatory action that can force a rival to respond less aggressively. To gain this advantage, one has to fully commit to their first response by taking concrete actions that'll make any other choice costly. That is, the first-mover advantage occurs when one commits to being aggressive. ]]> 2022-04-02 13:50:02 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126500433 A Game Tree Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126504780 Shows how a game plays out over time, with the first move forming the trunk, and then each subsequent choice branching out, so the final leaves show all possible outcomes.]]> 2022-04-02 13:55:19 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126504780 First-Mover Advantage Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126510391 The strategic gain from an anticipatory action that can force a rival to respond less aggressively. To gain the advantage, a player must credibly commit to their first response by taking concrete actions that'll make any other choice costly. ]]> 2022-04-02 14:04:49 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126510391 A Game Tree Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126511605 Shows how a game plays out over time, with the first move forming the trunk, and then each subsequent choice branching out, so the final leaves show all possible outcomes.The game tree is helpful in games that play out over time because figuring out your best response requires that you look forward and reason backward. 


]]> 2022-04-02 14:06:52 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126511605 Looking Forward and Reasoning Backward Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126515933 Look Forward: In games that play out over time, a player needs to anticipate the likely consequences of their decisions.

Reason Backward: Start by analyzing the last period of the game. Use this to figure what will happen in the second-to-last period, and keep reasoning backward until you can see all the consequences that follow from today’s decision.

]]> 2022-04-02 14:13:50 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126515933 Prune The Tree Method Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126520983 A method for solving game trees: Start by looking forward to the final period and highlighting out your rival’s best responses, then prune the options the rival would never choose—the “dead leaves”—off your game tree. Next, reason backward, by going one step closer to the base of the tree. Given the remaining branches and the leaves that they lead to, what choice will you make? Highlight that choice, then prune the other options, and keep going until you’ve reasoned back to today’s decision. If you’ve found a highlighted route all the way from the leaves in the last period to the trunk at the first period, then that’s the equilibrium, as it involves each player making a best response at each stage of the game.]]> 2022-04-02 14:20:58 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126520983 Second-Mover Advantage Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126523850 The strategic advantage that can follow from taking an action that adapts to your rival’s choice. The second-mover advantage arises because it gives you the flexibility to adapt your strategy in light of the choices made by the first mover.]]> 2022-04-02 14:24:46 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126523850 One-Shot, Repeated, Finitely Repeated Games, and Indefinitely Repeated Games Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126537903 One-Shot Game: Strategic interaction that occurs only once. In a one-shot game you don’t need to worry about how today’s decision might change how other others will treat you in the future.

Repeated Game: When you face the same strategic interaction with the same rivals and the same payoffs in successive periods.

Finitely Repeated Games: When you face the same strategic interaction a fixed number of times. Finitely repeated games are solved by looking forward and reasoning backward.

Indefinitely Repeated Games: When you face the same strategic interaction an unknown number of times. This is important because, if you don’t know when your interactions will end, there’s no last period in which you or your rival will definitely be tempted to defect. And this undermines the logic that leads you to want to defect in earlier periods. 

]]> 2022-04-02 14:44:46 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126537903 Strategic Plan Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126539169 A list of instructions that describes exactly how to respond in any possible situation. Importantly, your strategic plan may depend on past choices made by other players. This means that your strategic plan might include a threat to your rivals that if they defect from a collusive agreement, you’ll follow up with a punishment. If that threat is credible, it might be sufficient to elicit cooperation in an indefinitely repeated Prisoner’s Dilemma.]]> 2022-04-02 14:46:25 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126539169 Grim Trigger Strategy Gavin_Savercool https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126544994 If the other players have cooperated in all previous rounds, you will cooperate. But if any player has defected in the past, you will defect. Effectively this strategy says: I’m willing to cooperate, but if you fail to play along, I’ll punish you by defecting forever. You can see how this might provide a strong incentive for your rivals to cooperate!]]> 2022-04-02 14:55:45 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2126544994 CH 18 at a glance presleywebb https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129462126 2022-04-04 20:54:08 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129462126 Question to deepen understanding and practice presleywebb https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129466706 2022-04-04 20:57:56 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129466706 Another practice problem presleywebb https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129470839 2022-04-04 21:01:25 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129470839 Practice Problems presleywebb https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129472331 2022-04-04 21:02:51 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129472331 How Game Theory Strategy Improves Decision Making presleywebb https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129473754 2022-04-04 21:04:11 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129473754 Series of Podcasts explaining Game Theory presleywebb https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129476926 2022-04-04 21:07:05 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129476926 Game Theory Explained in One Minute kayleighoverley https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129637581 2022-04-05 00:03:04 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129637581 Game Theory Video kayleighoverley https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129638351 2022-04-05 00:03:51 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129638351 Multiple Game Theory Podcasts From Freakonomics kayleighoverley https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129642132 2022-04-05 00:07:08 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129642132 How Pop Culture Can Help Teach Game Theory kayleighoverley https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129655004 I found this article very interesting! It explains how game theory can be used in a way students are more likely to understand, comparing it to a popular tv show. ]]> 2022-04-05 00:18:02 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129655004 The Pandemic & Game Theory sherrysokolowski https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129798924 Although this article is 2 years old now, it is still interesting to read through. It discusses two differing methods to prioritize COVID-19 vaccinations. While this isn't a pressing issue currently, it's still a good example of a current event in relation to game theory and the Prisoner's Dilemma Game. ]]> 2022-04-05 02:03:13 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129798924 The Prisoner's Dilemma sherrysokolowski https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129806840 2022-04-05 02:09:16 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129806840 Crash Course Game Theory Video sherrysokolowski https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129818402 2022-04-05 02:17:43 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129818402 Game Theory & Ukraine-Russian Negotiations sherrysokolowski https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129823371 This article is a bit more pertinent as it discusses the winning and losing payoffs as well as the strategic choices in the growing conflict.]]> 2022-04-05 02:21:14 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129823371 Game Theory/Prisoner's Dilemma - a Psychology View sherrysokolowski https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129835733 This article still continues to explain game theory and the Prisoner's Dilemma but does so through an everyday lens that we can all relate to. ]]> 2022-04-05 02:29:52 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129835733 Chapter 18 summary chauhuynh1 https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129935046 Ch. 18 focuses on strategic interaction, which is defined as the best choices that you make depends on  what others choose, and vice versa. The four steps to the strategic decision is:

1. Consider all possible outcomes - make a payoff table to show your choices and other people's choices to see all the consequences of each choice
2. Think about what-ifs separately - break the problem down by considering each scenario apart from each other to help you see your best choices
3. Play your best response - place a checkmark next to the best possible action for you to take, factoring in what other choices people make too
4. Put yourself in someone else's shoes - see what your opponent is thinking by repeating steps 1-3 as who your opponent is. This helps you see how they think and what you can do to better your decision

There are 4 situations where you can apply these 4 steps:

1. The Prisoner's Dilemma - when each player's outcomes depend on other players' decisions
2. The Coordination Games - when your choices need to complement other players' choices
3. The Games That Play Out Over Time - choosing strategic actions over a period of time when you either don't know other players' actions, and vice versa
4. The Infinitely Repeated Interaction - when you are require to keep interacting to your opponent's moves but you don't know for how long]]> 2022-04-05 03:55:43 UTC https://padlet.com/ericaorians/nzv31ygysq38sakp/wish/2129935046