Game theory is the study of how people and businesses behave in strategic situations (i.e. when they must consider the effect of other people’s responses to their own actions). There are various types of games that might be studied.

Simultaneous Games

• When players effectively make decisions at the same time
• They don’t know the choices of other players when making their choices

Examples:

1. The Prisoners’ Dilemma
2. A game of Rock, Paper, Scissors
3. Split or Steal in Golden Balls
4. Individual plays in a game of American Football
5. Penalty shoot-outs in soccer matches
6. Serving and receiving in Tennis
7. Speed dating
8. Closed bid auctions
9. Athletes choosing to dope or not to dope

Simultaneous Games

• When players effectively make decisions at the same time
• They don’t know the choices of other players when making their choices

Examples:

1. The Prisoners’ Dilemma
2. A game of Rock, Paper, Scissors
3. Split or Steal in Golden Balls
4. Individual plays in a game of American Football
5. Penalty shoot-outs in soccer matches
6. Serving and receiving in Tennis
7. Speed dating
8. Closed bid auctions
9. Athletes choosing to dope or not to dope

One-Shot Games

• This is a game that is played only once
• The pay-off may be such that a game might be impossible to play twice
• E.g. mutually assured nuclear destruction
• Slightly different with tactical / conventional warfare
• In one-shot interaction, people often have an incentive to behave opportunistically / selfishly
• Consider a one shot Prisoners’ Dilemma game where an individual wants to minimise their own sentence

Repeated Games

Repeated games – a game played more than once

A very common feature of applied business – e.g. decisions on:

1. Pricing (Established supermarkets versus the Deep Discounters)
2. The size of marketing budgets (Coca Cola v Pepsi)
3. Research and development spend (Samsung v Apple v Huawei)
4. Capital investment and supply capacity forecasts (Cruise ships)

• With repeated games there is more scope for co-operative strategies to emerge
• Credible threat power – history of past behaviours
• Agents “learn by doing” – if someone continually serves to your backhand in tennis, your backhand will improve

Repeated games – a crucial point is the reaction to a defective strategy by another player

• Tit for Tat Strategy – if you defect, I defect in the next round
• Grim Strategy – if you defect, I will defect in all future rounds

Full revision presentation on Game Theory...