Harvard ECON1011 - Intermediate Microeconomics: Game Theory & Market Structures

Game theory is the study of strategic decision-making, where the outcome for each participant depends on the actions of all participants. It analyzes situations where players interact and their choices affect each other's payoffs.

A payoff matrix is a table used in game theory to represent the outcomes (payoffs) for each player based on the combination of strategies chosen by all players. Each cell in the matrix shows the payoff for each player given their respective actions.

A dominant strategy is a strategy that yields the highest payoff for a player regardless of the actions chosen by the other players. A player will always choose their dominant strategy if one exists.

A Nash Equilibrium is a set of strategies, one for each player, such that no player can improve their payoff by unilaterally changing their strategy, assuming the other players' strategies remain unchanged. It's a stable state where no player has an incentive to deviate.

The Prisoner's Dilemma is a classic game theory problem where two rational individuals might not cooperate, even if it appears that it is in their best interest to do so. Each prisoner has a dominant strategy to confess, leading to a sub-optimal outcome for both compared to if they had both remained silent.

A Pure Strategy Nash Equilibrium occurs when each player chooses a specific action with certainty, and no player can improve their payoff by unilaterally changing that specific action.

A Mixed Strategy Nash Equilibrium occurs when players randomize their actions according to a probability distribution, and no player can improve their expected payoff by unilaterally changing their probability distribution over actions.

A monopoly is a market structure characterized by a single seller, a unique product with no close substitutes, and high barriers to entry that prevent other firms from entering the market.