Microeconomics Lecture Outline

1. Game theory: analysis of strategic interaction among economic agents
   • Cooperative games: coomunication/coordination/bargaining possible
   • Non-cooperative games: no coomunication/coordination/bargaining

2. Game elements:
   • Player
   • Strategy (action)
   • Pay-off (utility)

3. Simultaneous-move games: players make moves at the same time
   • Normal form: pay-off table

   • Nash equilibrium: no deviation from equilibrium strategy

   • The chicken game: 2 equilibria (James Dean movie)
     

     A \ B	Straight	Swerve
     Straight	(-10, -10)	(5, -5)*
     Swerve	(-5, 5)*	(0, 0)

   • Battle of the sexes: focal-point equilibrium
     

     H \ W	Concert	Wrestle
     Concert	(1, 2)*	(-2, -2)
     Wrestle	(-1, -1)	(2, 1)*

     * Example: Meeting point at Main Station.

   • Chase and run: no equilibrium
     

     M \ F	Movie	Dinner
     Movie	(3, -3)	(-3, 3)
     Dinner	(-3, 3)	(3, -3)

   • The dominant/subordinate pigs: total 10 grains, "press" cost 1
     

     S \ D	Press	Not
     Press	(-1, 9)	(-1, 10)
     Not	(5, 4)*	(0, 0)

     * Weakness is strenth!
     * Pig experiment: Baldwin-Meese [1979]

   • Prisoners' dilemma (PD): [Rapoport-Chammah 1965]
     

     1 \ 2	Confess	Deny
     Confess	(-3, -3)*	(0, -6)
     Deny	(-6, 0)	(-1, -1)

     * Unique "dominant-strategy" equilibrium
     * Inefficient equilibrium: Pareto-inferior outcome
     * Example: arm race, cartel cheating, fake breast

   • Repeated games:
     • Finitely repeated PD game:
       • Backward induction: start from last round.
       • Still cheating in every period.

     • Infinite/indefinite PD game (supergame): [Axelrod 1984]
       • "Nice guy" (濫好人): always cooperate
       • "Avenger" (復仇者): betray forever if cheated on
       • "Traitor" (背叛者): always betray
       • "Tit-for-tat" (以牙還牙): cooperate first, then copy what your opponent does to you last time

     • "Tit-for-tat" applications:
       • Cartel/OPEC enforcement: oil dumping if anyone cheats.
       • Duopolistic competition: I'll cut your price if you cut mine.
       • Daily life: smile first, then treat you the way you treat me.

     • "You play fair with me, I play fair with you." (Movie Fatal Attraction, Glen Close v. Michael Douglas)

     • "I'll scratch your back, if you scratch mine. (American saying)

   • Auction and bidding:
     • Open auction
       • (Example) Yahoo/ebay, Forbes
       • All bidders know current best bid.
       • Bidding strategy: remain in bidding until price goes above your valuation
       • Winner has profit margin, seller cannot obtain full surplus.

     • Sealed-bid auction
       • First-price auction
       • Second-price auction: winner pays the 2nd-highest price.
       • Bidding strategy: bid your true valuation?

     • The Winner's Curese
       • (Example) Oil companies bidding for the right to drill
       • TV game-show: 5 players bidding for a prize of true value X
         • Player info: each given an estimate in {X-2000, X-1000, X, X+1000, X+2000}
         • Mean of these estimates is unbiased.
         • Game rule: highest bid wins.
         • Bidding strategy: should you bid the number (minus profit margin) you are given?

4. Sequential-move games: players make moves sequentially/alternatively
   • Extensive/strategic form: game tree

   • Subgame-perfect equilibrium (SPE)

   • Examples:
     • Entry deterrence game: challenger v. incumbent
       • Empty threat: incumbent will not fight (Fig. 7-1a)
       • Credible threat: "excess capacity" by incumbent (Fig. 7-1b)

     • Ultimatum game [Guth et al., JEBO 1982]
       • The dollar-splitting game:
         • Period 1: player A proposes (a,1-a) for both.
         • Period 2: player B may accept or reject (both get 0)
       • SPE: A proposes (1^-, 0⁺), and B accepts.
       • Experiment:
         • A proposes roughly equal sharing (a=50~60% for self)
         • B will refuse if (1-a) is too small.
         • People care about "fairness".

     • Alternating-offer games: housing market, new car dealer bargaining

     • Cake-cutting process: you cut, I pick