Economics and the Theory of Games

Economics and the Theory of Games

Economics and the Theory of Games

Economics and the Theory of Games

Synopsis

Fernando Vega-Redondo's self-contained account of the main contributions of modern game theory and its applications to economics starts with a detailed description of how to model strategic situations. The discussion proceeds by studying basic solution concepts and their main refinements; games played under incomplete information; and repeated games. For each of these theoretical developments, the text includes a companion set of applications that cover the most representative instances of game-theoretic analysis in economics (e.g., oligopolistic competition, public goods, coordination failures, bargaining, insurance markets, implementation theory, signaling and auctions).

Excerpt

The twofold aim of this book is to provide both a wide coverage of modern game theory and a detailed account of many of its economic applications. The book is possibly too extensive to be fully covered in a single course. However, selected parts of it could be used in a variety of alternative courses, by adapting either the focus (e.g., altering the relative emphasis on theory and applications) or the technical difficulty of the discussion (e.g., approaching the more advanced topics less formally). I have written the book with the aim of rendering these different routes to using the book reasonably easy to pursue.

The material is organized in twelve chapters. The first nine of them embody the topics that generally would be included in a standard course of game theory and economic applications. In line with my objective of providing a smooth integration of theory and applications, these nine chapters display a repeated alternation of one and the other. Thus, on the one hand, there are five theory chapters that cover in turn the basic Theoretical Framework (Chapter 1), Strategic-Form Analysis (Chapter 2), Refinements of Nash Equilibrium (Chapter 4), Incomplete Information (Chapter 6), and Repeated Interaction (Chapter 8). In each of these five chapters, the first part is devoted to “core topics, ” while the more demanding discussion is gathered next under the heading of “supplementary material.” In principle, most of the core topics could be taught at an undergraduate level, whereas the supplementary material typically would be covered only in more advanced (possibly graduate) courses.

Except for Chapter 1, each of the theory chapters has a subsequent companion one centered on applications (i.e., Chapters 3, 5, 7, and 9, respectively). These companion chapters include a thorough discussion of some of the most paradigmatic economic applications that rely on the corresponding theory. They are organized into three blocks or “general themes”:Oligopoly, Mechanism Design, and Markets, with each of them including five different applications (labeled I through V). The study of these applications could be conducted in at least three ways. One possibility, of course, is to discuss them in association with the companion theory. A second option is to cover these applications in separate blocks, each block then being used for a monographic course on the respective topic. Still a third approach is to gather them in terms of comparative difficulty, selecting those applications in each block that are best suited to the target level. To facilitate this route, the harder applications are singled out by adding a star (∗) to their headings, a general convention that is also used throughout this book in other respects (e.g., to mark those exercises that are somewhat more challenging than the others).

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