Microeconomic Game Theory - Assignment Example

First Number Game Theory 2 SIMULTANEOUS-MOVE GAMES WITH COMPLETE INFORMATION a. Dominance and Nash Equilibrium. Nash equilibrium and dominant strategies is a theory, which suggests of equilibrium, where the strategy of particular individual players is at optimal level in comparison to the strategies of other individuals. This equilibrium occurs during the absence of one-sided profitable deviation from any of the individuals (Gibbons 58; Mas-Colell, Whinston and Green 15). There is an instance, when I observed the true implementation this form of equilibrium, when candidates in an examination perform optimally and all of them receive cent percent marks. In such circumstances, it is difficult to identify the individual toper of the examination. This is known as dominance strategy and represents Nash equilibrium (Gibbons 58; Mas-Colell, Whinston and Green 15). The underneath graphical representation depicts the Time/Newsweek Cover Story Game Table. (Source: MIT, “Game Theory”) b. Equilibrium Refinements and Mixed Strategies. Mixed strategy in game theory is the random selection of strategies available to an individual. The number of strategies available is considered as infinite as each individual can make infinite number of strategies, considering several factors related to the decision (Salanie 25; Mas-Colell, Whinston and Green 15). Mixed strategy is also experienced in playing soccer matches or any other sports, where there are multiple strategies by an individual or team in order to win the match or tournament. Moreover, equilibrium refinement is a strategy in game theory, wherein individual strategies are different from others. This also indicates pure strategies (Mas-Colell, Whinston and Green 15; Fudenberg and Tirole 14). I have yet not experienced this form of strategies; however, I have an understanding that in a game, which involves strategies that cannot be repeated or copied by the others used in the match, can be considered as equilibrium refinement strategy. 2. SIMULTANEOUS-MOVE GAMES WITH INCOMPLETE INFORMATION  a. Bayesian Nash Equilibrium. One of the decisive theories that come under Game theory is the Bayesian Nash Equilibrium. In this context, it is eminent that the individual players have initial beliefs regarding other players. This determines the type of players or the capabilities of other individuals and supports the organization in effective strategy making (Bolton and Dewatripon 12; Mas-Colell, Whinston and Green 15). I witnessed this form of theory in several instances - during soccer matches and other matches, wherein the strategic decisions are made based on the capabilities of other individuals in the opponent team. The application of this theory has been highly effective, as it has contributed to the improvement of performance in the tournament. b. Application: Auctions. Auction is also another decisive aspect of game theory. In this context, every individual is supposed to have equal opportunity to win. However, the individuals with maximum capabilities are considered as the winner. In auctions, every individual do not have the compete knowledge regarding the capabilities of other individuals. In such circumstances, it is extremely difficult to make strategies (Mas-Colell, Whinston and Green 15; Fudenberg and Tirole 14). Although in the real life evidence, there are several auctions that have taken place, but unfortunately, I have not witnessed any one of the stated kind. However, in have noted some of the auctions in televisions, wherein every individual have similar opportunities, but the lacks complete knowledge regarding the capabilities of the others (Gibbons 58; Mas-Colell, Whinston and Green 15). 3. SEQUENTIAL-MOVE GAMES WITH COMPLETE INFORMATION  a. Sub-Game Perfect Nash Equilibrium. Sub-game Perfect Nash Equilibrium is a decisive aspect in game theory. This signifies sub-game to be a part of the game tree that itself constitutes of a well-defined tree (Fudenberg and Tirole 14; Mas-Colell, Whinston and Green 15). There are several evidences of sub game perfect Nash equilibrium. One of the examples of sub game includes the sports like cricket, chess, and others. These games have several other sub games. The underneath graphical representation depicts the Cleaners example Game Tree. (Source: MIT, “Game Theory”) b. Repeated Games and Applications. Repeated games and applications is a decisive aspect of game theory. This contributes to the repetition of games and applications, wherein the individual player has the complete knowledge and information of the market. However, in such circumstances the constraint factors are different. This may be for the execution or any other. In such, circumstances the presence of mind is highly decisive for repeated game applications (Fudenberg and Tirole 14; Mas-Colell, Whinston and Green 15). There are some of the prominent real life evidences of repeated games and applications. One of such prominent applications of the theory, which is extensively used by me, is the digitalized video games. In majority of such games, the similar consequent phases arrive repeatedly, as in such circumstances, quick presence of mind is very important. Although, in such games I have the complete knowledge regarding each step, but for successful completion of the game, activeness is intensely crucial. 4. SEQUENTIAL-MOVE GAMES WITH INCOMPLETE INFORMATION  a. Perfect Bayesian Equilibrium. Perfect Bayesian Equilibrium is one of those theories that come under game theory. According to this theory, players undertake their respective turn sequentially and not in a simultaneous approach. This theory attempts for increasing the spirit of the sub game perfection, which correspondingly leads to the optimization of the subsequent plays (Fudenberg and Tirole 14; Mas-Colell, Whinston and Green 15). One of the real evidences related to Perfect Bayesian Equilibrium is during the relay race. In such types of games, the individual moves in a sequential manner. Additionally, in such games, not all the participants could participate simultaneously, but rather in a sequential manner. b. Job Market Signaling, Cheap Talk. Another decisive aspect of game theory is the cheap talk. Cheap talk is a communication between the players, which does not directly affect the game payoffs (Fudenberg and Tirole 14; Mas-Colell, Whinston and Green 15). Cheap talk generally takes place during the initial stages of game. This considerably enhances the possibility of equilibrium outcomes. This is similar to job market signaling, wherein sending certain messages is more costly to the sender. This type of cheap talk is generally used in order to provoke the receiver. This type of aspects also occurs in order to break the confidence level of the other individuals. It significantly affects the performance of the other individuals (Fudenberg and Tirole 14; Mas-Colell, Whinston and Green 15). This, for instance, is notable in several occasions throughout the world. It occurs in the matches between the rival teams. The cheap talk before the start of the match between the rival teams enhances the possibility of equilibrium outcomes. It also affects the confidence level of the other teams. Besides this, real life evidences of cheap talk are also eminent from the political parties before the voting period. This significantly breaks the confidence level of the other individual and affects the other individuals’ performances (Fudenberg and Tirole 14; Mas-Colell, Whinston and Green 15). 5. ADVERSE SELECTION AND MECHANISM DESIGN a. Monopoly Screening. Monopoly screening is another aspect related to game theory, which suggests that in an optimal contract process, surplus could not be extracted from all agents included in the contract. The optimal surplus can also be gained from few individuals and not through all (Fudenberg and Tirole 14). Moreover, the theory also suggests that the individual who provides maximum value for assurance regarding the team’s performance is also the one who receives maximum insurance from the other members in the team (Mas-Colell, Whinston and Green 15). In this context, there are evidences, which suggest that in several sports including soccer, and others, the performance of all the individuals are unlikely to be at an optimal level. If one of these individuals performs better in a match, some of the other individuals must have to show comparatively poorer performances. This aspect is not only evident from sports, but in macro and micro economic scenario (Gibbons 58; Mas-Colell, Whinston and Green 15). The real life evidences in such theory is also eminent from market share of organizations in an industry. The performance of all the individual firms could not be higher with high market share at a defined period (Mas-Colell, Whinston and Green 15). b. Application: Screening in the Market for Insurance. Screening in the market of insurance is decisive crucial factor. Effective screening leads to the reduction of risk of an insurance organization. This also supports insurance sector organizations to exert its business process effectively and efficiently. This in return supports the insurance sector organizations to satisfy the customers effectively (Fudenberg and Tirole 14; Mas-Colell, Whinston and Green 15). Thus, the screening method of game theory is widely applicable to insurance organization. This significantly supports the insurance companies to undertake decisions related to insurance policies and other organizational risk related issues. It is thus important to note that some of the subjects, wherein game theory is significantly applicable including economics, political science, logic, and psychology, among others. The application of game theory on such subjects leads to the effective screening of market of insurance organizations and other risk factors engaged to insurance industry (Varian 15). There are certain real life evidences of insurance organizations too those have been significantly effective in screening in the market for insurance through using Game theory. These organizations include Metlife, Prudential Financial, American International Group (AIG), New York Life, Allianz life, amongst others (Fudenberg and Tirole 14). These insurance organizations have been considerably effective in reducing market risk that might affect its business process. Moreover, it is also eminent that these organizations have considerably improved its business process through the application of game theory. Subsequently, it has largely contributed to improved customers satisfaction. This in return contributed to organizational growth and development of these organizations (Fudenberg and Tirole 14). 6. MORAL HAZARD AND THE PRINCIPAL-AGENT PROBLEM (TIME PERMITTING) In economics terminology, ‘Moral Hazard’ is referred as the scenario when one individual or one party undertakes more risk, owing to the fact that other individual or party would bear the burden of those risks. In such circumstances, the activities of one individual or party could alter the circumstances of another (Gibbons 58; Mas-Colell, Whinston and Green 15). Moreover, moral hazard generally occurs in principal agent problem. In this regard, one party is known as principal and the party that undertakes the risk is known as agent. It is worth mentioning that the agents usually have more information in comparison to the principal (Fudenberg and Tirole 14). One of the greatest real life evidence of moral hazard is with regard to the subprime loans. In such circumstances, it was suspected that the borrowers would not be able to make payments in the long run (Gibbons 58; Mas-Colell, Whinston and Green 15). Thus, it was considered that the loans would not be of significant worth. However, there were several buyers of these loans who operated independently, who seldom consulted to the agents. This resulted into a significant principal agent problem (Fudenberg and Tirole 14). Works Cited Bolton, Patrick, and Mathias Dewatripont. Contract Theory. USA: MIT Press, 2005. Print. Fudenberg, Drew, and Jean Tirole. Game Theory. USA: MIT Press, 1991. Print. Gibbons, Robert. “A primer in game theory”. Princeton Univ. Press (1992): 1-252. Print. Mas-Colell, Andreu, Michael D. Whinston and Jerry R. Green. “Microeconomic Theory”. Oxford Univ. Press (1995). Print. “Game Theory.” MIT. ESD.10, n.d. Web. 26 Apr. 2015. Salanie, Bernard. The Economics of Contracts: A Primer. USA: MIT Press, 2005. Print. Varian, Hal. “Microeconomic analysis, 3rd edition.” WW Norton & company (1992). Print. Read More