# A Brief Introduction to the Basics of Game Theory

game-theoretic analysis are (1)

framing the situation in terms of the actions available to players and their payoﬀs as a function of actions, and (2) using various equilibrium notions to make either descriptive or 1

For graduate-level treatments, see Roger Myerson’s (1991) Game Theory: Analysis of Conﬂict, Cam-

bridge, Mass.: Harvard University Press; Ken Binmore’s (1992) Fun and Games, Lexington, Mass.: D.C. Heath; Drew Fudenberg and Jean Tirole’s (1993) Game Theory, Cambridge, Mass.: MIT Press; and Martin Osborne and Ariel Rubinstein’s (1994) A Course in Game Theory, Cambridge, Mass.: MIT Press. There are also abbreviated texts oﬀering a quick tour of game theory, such as Kevin Leyton-Brown and Yoav Shoham’s (2008) Essentials of Game Theory, Morgan and Claypool Publishers. For broader readings and undergraduate level texts, see R. Duncan Luce and Howard Raiﬀa (1959) Games and Decisions: Introduction and Critical Survey; Robert Gibbons (1992) Game Theory for Applied Economists; Colin F. Camerer (2003) Behavioral Game Theory: Experiments in Strategic Interaction; Martin J. Osborne (2003) An Introduction to Game Theory; Joel Watson (2007) Strategy: An Introduction to Game Theory; Avinash K. Dixit and Barry J. Nalebuﬀ (2010) The Art of Strategy: A Game Theorist’s Guide to Success in Business and Life; Joseph E. Harrington, Jr. (2010) Games, Strategies, and Decision Making, Worth Publishing. 2 “Noncooperative game theory” refers to models in which each players are assumed to behave selﬁshly and their behaviors are directly modeled. “Cooperative game theory,” which I do not cover here, generally refers to more abstract and axiomatic analyses of bargains or behaviors that players might reach, without explicitly modeling the processes. The name “cooperative” derives in part from the fact that the analyses often (but not always) incorporate coalitional considerations, with important early analyses appearing in John von Neumann and Oskar Morgenstern’s 1944 foundational book “Theory of Games and Economic Behavior.”

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Electronic copy available at: http://ssrn.com/abstract=1968579

prescriptive predictions. In framing the analysis, a number of questions become important. First, who are the players? They may be people, ﬁrms, organizations, governments, ethnic groups, and so on. Second, what actions are available to them? All actions that the players might take that could aﬀect any player’s payoﬀs should be listed. Third, what is the timing of the interactions? Are actions taken simultaneously or sequentially? Are interactions repeated? The order of play is also important. Moving after another player may give player i an advantage of knowing what the other player has done; it may also put player i at a disadvantage in terms of lost time or the ability to take some action. What information do diﬀerent players have when they take actions? Fourth, what are the payoﬀs to the various players as a result of the interaction? Ascertaining payoﬀs involves estimating the costs and beneﬁts of each potential set of choices by all players. In...

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