Game Theory Strategies to Know for AP Microeconomics

Game theory strategies help us understand decision-making in competitive situations. Concepts like Nash Equilibrium and dominant strategies reveal how players interact, while examples like the Prisoner's Dilemma show the tension between individual choices and collective outcomes.

1. Nash Equilibrium

   • A situation where no player can benefit by changing their strategy while the other players keep theirs unchanged.
   • It represents a stable state of a game where players' strategies are in mutual best response.
   • Nash Equilibria can exist in pure or mixed strategies.

2. Dominant Strategy

   • A strategy that is the best choice for a player, regardless of what the other players do.
   • If a dominant strategy exists, it simplifies decision-making for the player.
   • Not all games have a dominant strategy for every player.

3. Mixed Strategy

   • A strategy where a player randomizes over two or more pure strategies.
   • Useful in games where no pure strategy Nash Equilibrium exists.
   • Mixed strategies can help maintain unpredictability in competitive situations.

4. Prisoner's Dilemma

   • A standard example of a game that illustrates why two rational individuals might not cooperate.
   • Each player has an incentive to betray the other, leading to a worse outcome for both.
   • Highlights the conflict between individual rationality and collective benefit.

5. Tit-for-Tat

   • A strategy in repeated games where a player mimics the opponent's previous action.
   • Encourages cooperation by rewarding cooperation and punishing defection.
   • Simple and effective in fostering long-term cooperation in repeated interactions.

6. Backward Induction

   • A method used to solve dynamic games by analyzing the game from the end to the beginning.
   • Helps determine optimal strategies by considering future consequences of current actions.
   • Essential for finding subgame perfect equilibria in extensive-form games.

7. Subgame Perfect Equilibrium

   • A refinement of Nash Equilibrium applicable in dynamic games.
   • Requires that players' strategies form a Nash Equilibrium in every subgame of the original game.
   • Ensures that players' strategies are credible and optimal at every stage of the game.

8. Repeated Games

   • Games that are played multiple times, allowing for strategy adjustments based on past outcomes.
   • Can lead to different equilibria compared to one-shot games, often promoting cooperation.
   • The shadow of the future influences players' strategies and decisions.

9. Coordination Games

   • Games where players benefit from making the same choices or coordinating their strategies.
   • Multiple equilibria can exist, and players must communicate or signal to achieve the best outcome.
   • Examples include driving on the same side of the road or choosing a technology standard.

10. Chicken Game

    • A game that models a conflict where players must choose between cooperation and defection, with high stakes.
    • The best outcome occurs when one player cooperates while the other defects, but mutual defection leads to disaster.
    • Often used to analyze situations of brinkmanship and strategic commitment.

11. Stag Hunt

    • A game that illustrates the tension between safety and social cooperation.
    • Players can either hunt a stag (cooperate) or hunt a hare (defect), with stag hunting requiring mutual cooperation.
    • Highlights the importance of trust and coordination in achieving the best collective outcome.

12. Evolutionary Game Theory

    • Studies strategic interactions in populations where strategies evolve over time.
    • Focuses on how certain strategies can become dominant through natural selection.
    • Useful in biology, economics, and social sciences to understand behavior dynamics.

13. Bayesian Games

    • Games in which players have incomplete information about other players, often modeled with types.
    • Players use beliefs and probabilities to make decisions based on their information.
    • Important for analyzing situations with uncertainty and asymmetric information.

14. Minimax Strategy

    • A strategy used in zero-sum games where a player minimizes their maximum possible loss.
    • Focuses on the worst-case scenario to ensure the best possible outcome against an opponent's best strategy.
    • Commonly applied in competitive situations like chess and other strategic games.

15. Grim Trigger Strategy

    • A strategy in repeated games where a player cooperates until the opponent defects, after which they defect forever.
    • Serves as a strong deterrent against defection, promoting long-term cooperation.
    • Effective in maintaining cooperation in environments where players value future interactions.