Game Theory: Noncooperative Games

Abstract

We describe noncooperative game models and discuss game theoretic solution concepts. Some applications are also noted. Conventional theory focuses on the question 'how will rational players play?', and has the Nash equilibrium at its core. We discuss this concept and its interpretations, as well as refinements (perfect and stable equilibria) and relaxations (rationalizability and correlated equilibria). Motivated by experiments that show systematic theory violations, behavioral game theory aims to integrate insights from psychology to get better answers to the question 'how do humans play?'. We provide an overview of the observed regularities and briefly sketch (beginnings of) theories of boundedly rational play.

Analysis of competition & strategic investments in the LNG market

“…Efforts towards bridging the gap between both approaches have been old. Nash (1953) argued that the two approaches are complementary and he proposed building non-cooperative models of cooperative games, an idea that is referred to as the Nash program (Damme, 2004). This is still a promising avenue for future research (see for example Abbink et al, 2003).…”

“…Players are said to be rational when they seek to maximise their payoffs. Often it is assumed that each player's preferences over the set of outcomes of the game can be described by a (von Neumann and Morgenstern, 1944) utility function, hence players want to maximize their utility and only care about expected utility (Damme, 2004).…”

“…A closely related concept of is that of sequential equilibrium proposed in Kreps and Wilson (1982b) (see also Damme, 2004).…”

“…Myerson provides a concise review of the development of game theory starting from Nash in "J. Nash's Contribution to Economics" (Myerson, 1996). A concise overview of the game theoretic conceptual foundation can also be found in Damme (2004) and Owen (2004).…”

“…This dictates that the involved players' behaviour is consistent and motivated solely by the desire to obtain well-defined goals, while there are no cognitive constraints standing in the way. In contrast, the "biological" branch of game theory relies on no rationality at all, but assumes long time periods for selection to work (Damme, 2004).…”