Skip to main content Accessibility help

We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.

Close cookie message
×
Hostname: page-component-76fb5796d-vvkck Total loading time: 0 Render date: 2024-04-27T09:40:27.292Z Has data issue: false hasContentIssue false

7 - Strategic Uncertainty and Equilibrium Concepts

Published online by Cambridge University Press:  05 August 2013

Sushil Bikhchandani ,
Jack Hirshleifer  and
John G. Riley
Sushil Bikhchandani
Affiliation:
University of California, Los Angeles
John G. Riley
Affiliation:
University of California, Los Angeles
Get access

Summary

For the most part, the analysis to this point has dealt with event uncertainty. Individuals were mainly uncertain about nature's choice of state of the world. In the following chapters the focus shifts to strategic uncertainty, where the best course of action for individual A depends upon individual B's choice, and vice versa. So the main risks that a person has to deal with concern the actions and reactions of others. A first step is the choice of an equilibrium concept for such an environment, which turns out to be a subtle and still controversial issue. As usual, our discussion will not attempt to address formal issues of existence or uniqueness of equilibrium. Our aim instead is to provide an intuitive interpretation of the key ideas.

Dominant Strategy

We begin with the Prisoners’ Dilemma, a game that is easy to analyze. The story behind this game is as follows. Two accomplices have been arrested on suspicion of committing a major crime. The prosecutor does not have sufficient evidence to convict them of this crime. Without a confession from at least one of the two accomplices the prosecutor can only send them to prison for one year for the lesser charge of illegal possession of weapons. The two accomplices (or prisoners) are locked up in different cells and cannot communicate with each other. The prosecutor approaches each of them separately and says, “If you confess and your friend does not then I will drop all charges against you. On the other hand, if your friend confesses and you do not then you will do 10 years. If you both confess then I’ll see to it that you get parole after 5 years in prison. Think hard about what you want to do and let me know tomorrow morning.”

Type
Chapter
Information
The Analytics of Uncertainty and Information , pp. 270 - 307
Publisher: Cambridge University Press
Print publication year: 2013

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alchian, Armen, A., “Uncertainty, Evolution, and Economic Theory,” Journal of Political Economy, 58 (1950), 211–221.Google Scholar
Cho, In-Koo and Kreps, David M., “Signalling Games and Stable Equilibria,” Quarterly Journal of Economics, 102 (1987), 179–221.CrossRefGoogle Scholar
Cournot, Augustin, Recherches sur les Principes Mathématiques de la Théorie des Richesses, Paris: Hachette, 1838.Google Scholar
Friedman, Daniel, “Evolutionary Games in Economics,” Econometrica, 59 (1991), 637–666. Reprinted in Eric Maskin, ed., Recent Developments in Game Theory, a volume in the series The International Library of Critical Writings in Economics, Northampton, MA: Edward Elgar, 1999.CrossRefGoogle Scholar
Friedman, James W., Game Theory with Applications to Economics, New York: Oxford University Press, 1986.Google Scholar
Fudenberg, Drew, and Tirole, Jean, Game Theory, Cambridge, MA: MIT Press, 1991.Google Scholar
Gibbons, Robert, Game Theory for Applied Economists, Princeton: Princeton University Press, 1992.Google Scholar
Grossman, Sanford and Motty, Perry, “Perfect Sequential Equilibrium,” Journal of Economic Theory, 39 (1986), 120–154.CrossRefGoogle Scholar
Harsanyi, John G., “Games with Incomplete Information Played by ‘Bayesian’ Players,” Management Science, 14 (1967–68), 159–182, 320–334, 486–502.CrossRefGoogle Scholar
Hirshleifer, Jack, “Evolutionary Models in Economics and Law: Cooperation versus Conflict Strategies,” Research in Law and Economics, 4 (1982), 1–60.Google Scholar
Hirshleifer, Jack and Coll, Juan Carlos Martinez, “What Strategies Can Support the Evolutionary Emergence of Cooperation?” Journal of Conflict Resolution, 32 (1988), 367–398.CrossRefGoogle Scholar
Kohlberg, Elon and Mertens, Jean-François, “On the Strategic Stability of Equilibria,” Econometrica, 54 (1986), 1003–1038.CrossRefGoogle Scholar
Kreps, David M. and Wilson, Robert, “Sequential Equilibrium,” Econometrica, 50 (1982), 863–894.CrossRefGoogle Scholar
Liebowitz, Stan J. and Margolis, Stephen E., “The Fable of the Keys,” Journal of Law and Economics, 33 (1990), 1–25.CrossRefGoogle Scholar
Maynard Smith, John, “Evolution and the Theory of Games,” American Scientist, 64 (1976), 41–45.Google Scholar
Maynard Smith, John, Evolution and the Theory of Games, Cambridge: Cambridge University Press, 1982.CrossRefGoogle Scholar
Myerson, Roger, “Refinements of the Nash Equilibrium Concept,” International Journal of Game Theory, 7 (1978), 73–80.CrossRefGoogle Scholar
Myerson, Roger, Game Theory: The Analysis of Conflict, Cambridge, MA: Harvard University Press, 1997.Google Scholar
Nash, John F., Jr., “Non-Cooperative Games,” Annals of Mathematics, 54 (1951), 286–295.CrossRefGoogle Scholar
Osborne, Martin J. and Rubinstein, Ariel, A Course in Game Theory, Cambridge, MA: MIT Press, 1994.Google Scholar
Riley, John G., “Evolutionary Equilibrium Strategies,” Journal of Theoretical Biology, 76 (1979), 109–123.CrossRefGoogle ScholarPubMed
Selten, Reinhard, “Spieltheoretische Behandlung eines Oligopolmodells mit Nachfrägetragheit,” Zeitschrift für die gesamte Staatswissenschaft, 121 (1965), 301–324 and 667–689.Google Scholar
Selten, Reinhard, “A Reexamination of the Perfectness Concept for Equilibrium Concepts in Extensive Games,” International Journal of Game Theory, 4 (1975), 25–55.CrossRefGoogle Scholar
Taylor, Peter D. and Jonker, Leo B., “Evolutionarily Stable Strategies and Game Dynamics,” Mathematical Biosciences, 40 (1978), 145–156.CrossRefGoogle Scholar
Weibull, Jorgen W., Evolutionary Game Theory, Cambridge, MA: MIT Press, 1997.Google Scholar
Winter, Sidney G., “Economic ‘Natural Selection’ and the Theory of the Firm,” Yale Economic Essays, 4 (1964), 225–272.Google Scholar
Zeeman, Erik C., “Dynamics of the Evolution of Animal Conflicts,” Journal of Theoretical Biology, 89 (1981), 249–270.CrossRefGoogle Scholar

Save book to Kindle

To save this book to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×