Game Theory Concepts to Know for AP Microeconomics

Game theory concepts are crucial in understanding strategic interactions among players in economics. Key ideas like Nash Equilibrium, dominant strategies, and the Prisoner's Dilemma reveal how individual choices impact collective outcomes, shaping decision-making in competitive environments.

1. Nash Equilibrium

   • A situation where no player can benefit by changing their strategy while the other players keep theirs unchanged.
   • Represents a stable state in a game where players' strategies are in balance.
   • Can occur in pure strategies (specific actions) or mixed strategies (probabilistic actions).

2. Dominant Strategy

   • A strategy that is the best choice for a player, regardless of what the other players choose.
   • If a dominant strategy exists, players will always choose it, leading to predictable outcomes.
   • Not all games have a dominant strategy for every player.

3. Prisoner's Dilemma

   • A classic example of a game where two players can either cooperate or defect, with the best collective outcome achieved through cooperation.
   • Individual rationality leads to a suboptimal outcome (both defecting) despite mutual benefit from cooperation.
   • Highlights the conflict between individual interests and collective welfare.

4. Payoff Matrix

   • A table that shows the payoffs for each player based on their chosen strategies.
   • Helps visualize the outcomes of different strategy combinations in a game.
   • Essential for identifying Nash equilibria and dominant strategies.

5. Sequential Games

   • Games where players make decisions one after another, allowing later players to react to earlier actions.
   • Often analyzed using game trees to represent possible moves and outcomes.
   • Can involve strategies like backward induction to determine optimal moves.

6. Simultaneous Games

   • Games where players make decisions at the same time without knowledge of the other players' choices.
   • Requires players to anticipate the actions of others, often leading to mixed strategies.
   • Commonly analyzed using the payoff matrix.

7. Mixed Strategies

   • A strategy where a player randomizes over possible actions to keep opponents uncertain.
   • Useful in games where no pure strategy Nash equilibrium exists.
   • Can lead to more unpredictable and strategic gameplay.

8. Cooperative vs. Non-cooperative Games

   • Cooperative games allow for binding agreements and collaboration among players to achieve better outcomes.
   • Non-cooperative games focus on individual strategies without the possibility of enforceable agreements.
   • The distinction affects how players approach strategy and outcomes.

9. Tit-for-Tat Strategy

   • A strategy in repeated games where a player mimics the opponent's previous action (cooperate if they cooperated, defect if they defected).
   • Encourages cooperation and can lead to mutually beneficial outcomes in repeated interactions.
   • Simple yet effective in promoting long-term cooperation.

10. Repeated Games

    • Games that are played multiple times, allowing players to adjust strategies based on past outcomes.
    • Can lead to different equilibria compared to one-shot games, often fostering cooperation.
    • The possibility of future interactions influences players' current strategies and decisions.