Table of Contents

PREFACE
1 INTRODUCTION TO GAME THEORY
Introduction
Strategic behavior
Short history of game theory
Lexicon of game theory
Rational versus actual behavior
Practice Exercises
PART I: STATIC GAMES WITH COMPLETE INFORMATION
2 COALITION GAMES
Introduction
Prisoner’s dilemma
The extensive form
The normal form
Nash equilibrium
Shortcut for finding-pure strategy Nash equilibria
Determinants of business collusion
Number of firms with similar interests
Firm size relative to the industry
Visibility
Practice Exercises
3 STRATEGIC MOVES AND DETERRING DEFECTION
Introduction
Strategic moves
Deterring defection
Contracts
Reputation
Cutting off communications
Preventing retreat
Brinksmanship
Incrementalism
Teamwork
Agents
Practice exercises
4 COMPETITION GAMES
Introduction
Strictly-dominant strategies
Weakly-dominant strategies
Iterated elimination of dominated strategies
Three-player games
Non-dominant strategies
Maximin (secure) strategy
Practice exercises
5 COORDINATION GAMES
Introduction
Battle-of-the-sexes game
Focal-point equilibrium
Developing a theory of focal-point equilibria
Framing
Practice Exercises
6 INFINITELY-REPEATED GAMES
Introduction
Coalitions
Repeated static games
Trigger strategies
Evaluating payoffs in infinitely-repeated games
Practice Exercises
7 FINITELY-REPEATED GAMES
Introduction
Finitely-repeated games with a certain end
End-of-game problem
Finitely-repeated games with an uncertain end
A word of caution
Concluding remarks
Practice Exercises
8 EVOLUTION GAMES
Introduction
Evolutionary game theory
Reproductive success
Evolutionary equilibrium
Networks
Positive feedback effects
Network game
Implications
Practice Exercises
9 TIT-FOR-TAT
Introduction
Tit-for-tat
End-of-game problem
Practice Exercises
10 MIXING PURE STRATEGIES
Introduction
Zero-sum games
Matching pennies
Minimax theorem
Mixed strategies
Optimal mixing rules
Calculating optimal mixing rules
When to use optimal mixing rules
How to use optimal mixing rules
Bluffing
Practice Exercises
11. CONTINUOUS STRATEGIES
Introduction
Continuous strategies
Best-response (reaction) functions
Tragedy of the commons
Shifting best-response functions
Practice Exercises
12. STATIC OLIGOPOLY GAMES
Introduction
Cournot model
Advertising in a Cournot setting
Bertrand model
Bertrand paradox
Practice Exercises
13. STRATEGIC TRADE POLICY
Introduction
Discrete pure strategies
Continuous pure strategies
National welfare
Intraindustry trade
Imperfect competition
Intraindustry coalitions
Export subsidies
Reciprocity
Practice Exercises
14. PRODUCT DIFFERENTIATION
Introduction
Horizontal differentiation
Vertical differentiation
Location
Product differences
Practice exercises
15. STRATEGIC COMPLEMENTS
Introduction
Double marginalization
Practice exercises
PART II: DYNAMIC GAMES WITH COMPLETE AND PERFECT INFORMATION
16. GAME TREES
Introduction
Game trees
Subgame perfection
Backward induction
Credible threats
First-mover advantage
Entry deterrence
Practice Exercises
17. A DYNAMIC OLIGOPOLY GAME
Introduction
Stackelberg model
Practice Exercises
18. BARGAINING
Introduction
The bargaining problem
Ultimatum bargaining
Ultimatum paradox
Nash bargaining
Rubenstein bargaining
Last-mover’s advantage
Symmetric impatience
Asymmetric impatience
Practice Exercises
PART III: GAMES WITH INCOMPLETE INFORMATION
19. DECISION MAKING AND UNCERTAINTY
Introduction
Risk and uncertainty
Static games with uncertain payoffs
Static games in extensive form
Dynamic games with uncertain payoffs
Attitudes towards risk
Risk aversion
Understanding risk-averse behavior
Practice Exercises
20. ADVERSE SELECTION
Introduction
The market for lemons
Practice Exercises
21. INCENTIVE CONTRACTS
Introduction
Principal-agent problem
Incentive contracts
Principal-agent problem with moral hazard
Practice Exercises
PART IV: GAMES WITH IMPERFECT INFORMATION
22. INFORMATION SETS
Introduction
Information sets
Bayesian updating
Practice Exercises
23. AUCTIONS
Introduction
Types of auctions
Information structures
Complete-information auctions
Sealed-bid, first-price auction
Sealed-bid, second-price auction
English auction
Dutch auction
Expected revenues from complete-information auctions
Incomplete-information auctions with independent private values
Sealed-bid, first-price auction
Sealed-bid, second-price auction
English auction
Dutch auction
Expected revenues from incomplete-information auctions with independent private values
Incomplete-information auctions with correlated value estimates
Common-value auctions and the winner’s curse
Incomplete-information auctions and risk aversion
Practice exercises
24. SIGNALING
Introduction
Spence education game
Pooling strategy
Separating strategy
Corporate investment game
Multiple subgame-perfect Bayesian equilibria
Practice Exercises
25. SCREENING
Introduction
Self-selection
Spence education game in reverse
Practice Exercises
APPENDICES
REFERENCES AND SUGGESTIONS FOR FURTHER READING
INDEX

About the Author

Thomas J. Webster is a professor of economics in the Department of Finance and Economics of Pace University’s Lubin School of Business in New York City. Before joining the faculty at Pace University, Dr. Webster held positions as an international economist with the Central Intelligence Agency, the U.S. Department of Defense, Manufacturers Hanover Trust Company, and Continental Illinois National Bank and Trust Company. Dr. Webster has served as graduate and undergraduate finance program chair, and as faculty advisor to Beta Gamma Sigma, the international honor society for collegiate schools of business. He is the recipient of the Lubin School of Business Scholarly Research Award for Basic Scholarship, the Lubin School of Business Outstanding Faculty Service Award, the Pace University Award for Distinguished Service, and the Beta Gamma Sigma Commitment to Excellence Award. Dr. Webster received his BA from the School of International Service of American University, and his MA, MPhil, and PhD from the City University of New York.

Reviews

Business decisions are rarely made in a competitive vacuum. A manager’s ability to maximize a firm’s value on behalf of shareholders may be hamstrung by an inability to raise finance capital, disruption in the flow of critical raw materials, shortages of skilled labor, capacity constraints, labor unrest, insufficient warehouse space, more. Managers who are able to put themselves in to the shoes of rivals are more likely to successfully achieve the firm’s objectives than those who do not. This volume is an introduction to game theory, the systematic analysis of decision making in interactive settings. Game theory identifies a decision maker’s best response to situations involving move and counter move. Thomas J. Webster is professor of economics in the Department of Finance and Economics of Pace University’s Lubin School of Business in NYC.
*Wonderpedia*

Wrong incentive compatibility frameworks are at the root of the current global economic recession. Game theory is at the core of modern economic analysis, and Thomas J. Webster’s textbook is the first step to understand it.  It is simple in exercises, yet deep in concepts.
*Augusto Schianchi, Universita Degli Studi di Parma*

Webster does a great job of relating different strands of game theory to business applications. The book helps managers understand how to anticipate and optimally react to their rivals’ actions.
*David J. Gabel, Queens College*

This is an excellent text, clearly written with practical end of chapter questions. It is perfect for teaching students who may not have a sophisticated mathematical background. It makes a major contribution in making game theory accessible to a broad audience, and is a pleasure to read.
*Joan Nix, Queens College*