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1 GAMES FOR BUSINESS AND ECONOMICS ROY/GARDNER Indiana University Nachrichtentechnische BibliotHek TUD Inv.-Nr.: /S.JOtUM- John Wiley & Sons, Inc. 5" New York Chichester Brisbane Toronto Singapore
2 Contents Part I Basic Game Theory I 1 An Introduction to Games and Their Theory What Is a Game? S 1.2 What Is Game Theory, and Why? One-Person Games with Perfect Information Utility One-Person Games with Imperfect Information The Three Attitudes toward Risk Two-Person Games with Perfect Information Games like Chess Extensive Form, Normal Form, and Coalition Function Form 28 2 Two-Person Games Zero-Sum Games and Constant-Sum Games Competitive Advantage One-Card Stud Poker Solutions of Two-Person, Zero-Sum Games Two-Person, Variable-Sum Games A Sufficient Condition for Solving Variable-Sum Games Cigarette Advertising on Television Two-Person Games with Many Strategies Existence of Equilibrium 55 Appendix Winning at Blackjack 59 3 Mixed Strategies and Mixed Strategy Equilibrium Mixed Strategies Computing Mixed Strategy Equilibria in 2 x 2 Games 70 xii
3 3.3 Mixed Strategies and Bluffing: Liar's Poker Mixed Strategy Equilibria of Coordination Games and Coordination Problems Asymmetrical Mixed Strategy Equilibria Everyday Low Prices 81 Appendix Bluffing in One-Card Stud Poker 86 4 n-person Games in Normal Form Fundamental Differences with Three Players: The Spoiler Competitive Advantage and Market Niche with Three Players 4.3 Three-Player Versions of Video System Coordination, Let's Make a Deal, and Cigarette Television Advertising Stonewalling Watergate Symmetry and Games with Many Players Solving Symmetrical Games with Many Strategies The Tragedy of the Commons 108 Appendix Tragedy of the Commons in the Laboratory Noncooperative Market Games in Normal Form Quantity Competition between Two Firms Cournot Competition, Two Firms, Many Strategies Cournot Variations, Including Many Firms Are Coffee Prices Going Up? Price Competition between Two Firms Bertrand Variations Market Games with Differentiated Products Bertrand Competition among Differentiated Products in the Cigarette Industry 138 Appendix Uniqueness of Equilibrium 141 Part II Games with Sequential Structure Credibility and Subgame Perfect Equilibrium Subgames and Their Equilibria Maintaining Credibility via Subgame Perfection Credible Threats and Promises Reluctant Volunteers: Conscription in the American Civil War, Mutually Assured Destruction Credible Quantity Competition: Cournot-Stackelberg Equilibrium Credible Price Competition: Bertrand-Stackelberg Equilibrium Differentiated Products 168
4 6.9 This Offer Is Good for a Limited Time Only 170 Appendix Ultimatums in the Laboratory Repeated Games Strategies and Payoffs for Games Played Twice Two-Person, Zero-Sum Games Played More Than Once Variable-Sum Games with a Single Equilibrium, Played Twice OPEC Drops Quotas Variable-Sum Games with Multiple Equilibria, Played Finitely Many Times Infinitely Repeated Games: Strategies and Payoffs Infinitely Repeated Cournot Market Games Price Leadership in the Ready-to-Eat Cereals Industry Evolutionary Stability and Bounded Rationality How Boundedly Rational Players Play Games ESS for 2x2 Symmetrical Games Frogs Call for Mates ESS for 2x2 Asymmetrical Games Fast Learning with a Finite Number of Players The Evolution of Video Games 229 Appendix Evolution in the Laboratory 233 Part III Games with Imperfect Information Signaling Games and Sequential Equilibrium Two-Player Signaling Games Sequential Equilibrium: Pure Strategies Sequential Equilibrium: Mixed Strategies The Market for Lemons Costly Commitment as a Signaling Device Repeated Signaling and Track Records Barbarians at the Gate Games between a Principal and an Agent Principal Versus Agent: Perfect Information Principal Versus Agent: Subgame Perfect Equilibrium Principal Versus Agent: Imperfect Information Depositor Versus S&L Principal Versus Agent When Attitudes toward Risk Differ 288
5 Contents 10.6 Principal Versus Agent with Two Types of Agents Compensating Corporate Executives Auctions Sealed-Bid Auctions with Complete Information Second-Price Auctions Individual Private-Value Auctions Auctioning Off Failed Thrifts Common-Value Auctions Bidding for Offshore Oil 319 Appendix Auctions in the Laboratory 322 Part IV Games Involving Bargaining Two-Person Bargains Bargaining Games Asymmetries and the Nash Bargaining Solution Bankruptcy I: Independence of Irrelevant Alternatives and the Nash Bargaining Solution Bankruptcy II: Monotonicity and the Kalai-Smorodinsky Solution MCI and BT Make a Deal Sequential Bargaining with Perfect Information Sequential Bargaining with Imperfect Information United States-Japan Trade Negotiations 348 Appendix Bargaining in the Laboratory Arbitration Conventional Arbitration A Random, but Not Arbitrary, Arbitrator Conventional Grievance Arbitration Fred Witney, Professional Arbitrator Final Offer Arbitration Final Offer Arbitration in Major League Professional Baseball n-person Bargaining and the Core n-person Bargaining Games Solutions for n-person Bargaining Games in Coalition Function Form n-person Bankruptcy Games The Bank of Credit and Commerce International Goes Bust 393 XV
6 14.5 The Coalition Function When Intermediate Coalitions Have Power The Core of a Game in Coalition Function Form Sharing Defense Burdens Bosnian Peace Plans 404 Part V Games, Markets, and Politics Two-Sided Markets and Matching Games Two-sided Markets: The Fundamentals The Coalition Function of a Two-Sided Market Game The Core of a Two-Sided Market Game Limitations on Core Equivalence Barbarians at the Gate II: The Core Two-Sided Matching Games Matching Games in Coalition Form Sorority Rush Voting Games Two-Candidate Voting Games with a Discrete Issue Spectrum Two-Candidate Voting Games with a Continuous Issue Spectrum MultiCandidate Voting Games Multicandidate Presidential Elections, Positional Voting Rules Voting Games in Coalition Function Form Measuring Power Expanding the United Nations Security Council 460 Suggestions for Further Readings 468 Games List 470 Index 471
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