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ECO290E: Game Theory

ECO290E: Game Theory. Lecture 6 Dynamic Games and Backward Induction. Midterm Information. 4 or 5 questions; each question may contain a couple of sub-questions. The coverage of the exam is all the lectures (Lec.1-6) except for dynamic games.

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ECO290E: Game Theory

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  1. ECO290E: Game Theory Lecture 6 Dynamic Games and Backward Induction

  2. Midterm Information • 4 or 5 questions; each question may contain a couple of sub-questions. • The coverage of the exam is all the lectures (Lec.1-6) except for dynamic games. • The exam will take just one hour (at the 6th period on Friday, Feb. 22nd). • The maximum points (scores) are 80, not 100. • I will explicitly show the maximum points for each question. • I plan to have a final exam taking 90 minutes and 120 maximum points; If your performance on the midterm will be not good, you would still have enough chance to recover!!

  3. Review • Reporting a Crime • Check the slides for Lecture 5. • Cournot Model • Check the handout I gave you in Lecture 4 (You don’t need to care about the iterated elimination argument there, since it is a bit too difficult.)

  4. Dynamic Game • Each dynamic game can be expressed by a “game tree.” (it is formally called extensive-form representation) • Dynamic games can also be analyzed in strategic form: a strategy in dynamic games is a complete action plan which prescribes how the player will act in each possible contingencies in future.

  5. Entry and Predation • There are two firms in the market game: a potential entrant and a monopoly incumbent. • First, the entrant decides whether or not to enter this monopoly market. • If the potential entrant stays out, then she gets 0 while the monopolist gets a large profit. • If the entrant enters the market, then the incumbent must choose whether or not to engage in a price war • If he triggers a price war, then both firms suffer. • If he accommodates the entrant, then both firms obtain modest profits.

  6. Strategic-Form Analysis • Is (Out, Price War) a reasonable NE?

  7. Game Tree Analysis [to be completed]

  8. Lessons • Dynamic games often have multiple Nash equilibria, and some of them do not seem plausible since they rely on non-credible threats. • By solving games from the back to the forward, we can erase those implausible equilibria. • Backward Induction • This idea will lead us to the refinement of NE, the subgame perfect Nash equilibrium.

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