Game Theory Basics Bernhard von Stengel Department of Mathematics, London School of Economics, Houghton St, London WC2A 2AE, United Kingdom email:
[email protected] February 15, 2011 ii The material in this book has been adapted and developed from material originally produced for the BSc Mathematics and Economics by distance learning offered by the University of London External Programme (www.londonexternal.ac.uk). I am grateful to George Zouros for his valuable comments, and to Rahul Savani for his continuing interest in this project, his thorough reading of earlier drafts, and the fun we have in joint research and writing on game theory. Preface Game theory is the formal study of conflict and cooperation. It is concerned with situa- tions where “players” interact, so that it matters to each player what the other players do. Game theory provides mathematical tools to model, structure and analyse such interac- tive scenarios. The players may be, for example, competing firms, political voters, mating animals, or buyers and sellers on the internet. The language and concepts of game theory are widely used in economics, political science, biology, and computer science, to name just a few disciplines. Game theory helps to understand effects of interaction that seem puzzling at first. For example, the famous “prisoners’ dilemma” explains why fishers can exhaust their resources by over-fishing: they hurt themselves collectively, but each fisher on his own cannot really change this and still profits by fishing as much as possible. Other insights come from the way of looking at interactive situations. Game theory treats players equally and recommends to each player how to play well, given what the other players do.