Microeconomics For Dummies

Chapter 16

Playing Games with Economic Theory

In This Chapter

Seeing how games are designed

Exploring three games useful to economists

Finding out how repeating a game affects what happens

Game theory provides a powerful set of tools for probing into and modeling situations from an economist’s perspective. It’s a way to think about strategic behavior and help clarify how outcomes affect behavior, and vice versa. Economists have used game theory to look at problems as diverse as nuclear deterrence, how animals display dominance, and even the best way for a striker and a goalkeeper to act in a penalty shootout in soccer. You can approach these problems using an underlying model that takes into account the behavior of more than one decision-maker at a time and considers what they may do in a situation where the benefits — and of course the costs — depend on everyone’s actions.

Game theory is one of the most popular areas of microeconomics. When you know some of the models, you begin to recognize that game-theoretic situations feature in many films and TV shows, from The Godfather and The Wire to Dr. Strangelove. The famous Prisoner’s Dilemma game (discussed later in this chapter) is ...