One week, two big topics! Today we’re discussing Game Theory.
This topic is awesome, and really wish we could give it more space – in future economics you will.
So what are we thinking about here.
In our first six weeks we built a model where people’s actions didn’t influence the incentives of others – and so couldn’t influence their actions. For example, if I decided to go buck-wild buying potato chips, it wouldn’t change the the price of chips.
However, this isn’t always the case. If a firm decides to set a higher price it can still sell some product, and by doing so it will lead to other firms seeing a direct increase in their own demand. If I decide to not show up to a hockey game, our teams ability to play will be worsened by being down a player (arguably) – then other players may then have an incentive to just not bother showing up.
These are real life situations we can relate to where people’s actions are interdependent. And this is the key of what game theory is – where your payoff depends on the actions of other, and their expectations of your actions, this creates scope for strategic behaviour.
The two games we look at today in class are a prisoner’s dilemma, and a coordination game. Once you understand those games you will start to see them everywhere. See you there.