ECON 301 Syllabus

Game Theory

Dr. Şafak Özden

October 6, 2024

Course Description
This course provides a rigorous introduction to game theory, focusing on the formal mathematical analysis
of strategic interactions among rational decision-makers. The curriculum covers static and dynamic games
of complete and incomplete information, aligned with the topics outlined below. The course is designed for
third-year Economics and Computer Science students with mixed backgrounds. All necessary mathematical
concepts will be taught during the course.

Learning Objectives
By the end of this course, students will:

• Understand and apply fundamental concepts of game theory.

• Analyze static and dynamic games of complete and incomplete information.
• Calculate Nash equilibria in pure and mixed strategies.

• Apply game-theoretic models to economic scenarios like Cournot and Bertrand competition.
• Understand and analyze fair games and zero-sum games.
• Explore signaling games and Bayesian equilibria.

Prerequisites
No formal prerequisites. Familiarity with basic algebra is expected. All required mathematical concepts,
including probability, expectation, and utility theory, will be covered in the class.

Required Texts and Materials

• Gibbons, Robert Game Theory for Applied Economists. Princeton University Press, 1992.

Course Outline
1. Static Games of Complete Information
• 1.1 Basic Theory: Normal-Form Games and Nash Equilibrium
– 1.1.A Normal-form representation of games
– 1.1.B Iterated elimination of strictly dominated strategies

1
 – 1.1.C Motivation and definition of Nash Equilibrium
– Fair Game Example: Matching Pennies
∗ Analyze the zero-sum game of Matching Pennies
∗ Discuss fair game properties in the context of Nash Equilibrium
• 1.2 Applications
– 1.2.A Cournot model of duopoly
– 1.2.B Bertrand model of duopoly
– 1.2.C Final-offer arbitration
– 1.2.D The problem of the commons
– Fair Game Variant: Zero-Sum Duopoly Models
∗ Explore duopoly models under zero-sum assumptions
∗ Analyze how fair competition affects market outcomes
• 1.3 Advanced Theory: Mixed Strategies and Existence of Equilibrium
– 1.3.A Mixed strategies
– 1.3.B Existence of Nash Equilibrium
– Fair Game Example: Rock-Paper-Scissors
∗ Study the mixed-strategy equilibrium in Rock-Paper-Scissors
∗ Discuss the fairness and zero expected payoff
• 1.4 Fair Games and Zero-Sum Games
– Definition and examples of fair games
– Zero-sum games and the Minimax Theorem
– Applications in economics and computer science
2. Dynamic Games of Complete Information
• 2.1 Dynamic Games of Complete and Perfect Information
– 2.1.A Theory: Backwards induction
– 2.1.B Stackelberg model of duopoly
– 2.1.C Wages and employment in a unionized firm
– 2.1.D Sequential bargaining
– Fair Game Variant: Sequential Zero-Sum Games
∗ Analyze sequential games where payoffs sum to zero
∗ Example: The game of Nim
∗ Discuss fairness in sequential move games
• 2.2 Two-Stage Games of Complete but Imperfect Information
– 2.2.A Theory: Subgame perfection
– 2.2.B Bank runs
– 2.2.C Tariffs and imperfect international competition
– 2.2.D Tournaments
– Fair Game Example: Battle of the Sexes with Equal Payoffs
∗ Modify the Battle of the Sexes game to have equal payoffs
∗ Discuss coordination in fair games
• 2.3 Repeated Games
– 2.3.A Theory: Two-stage repeated games
– 2.3.B Infinitely repeated games
– 2.3.C Collusion between Cournot duopolists
– 2.3.D Efficiency wages

2
 – 2.3.E Time-consistent monetary policy
– Fair Game Variant: Repeated Prisoner’s Dilemma with Zero-Sum Payoffs
∗ Explore the repeated zero-sum version of the Prisoner’s Dilemma
∗ Discuss strategies and fairness over time
• 2.4 Dynamic Games of Complete but Imperfect Information
– 2.4.A Extensive-form representation of games
– 2.4.B Subgame-perfect Nash Equilibrium
– Fair Game Example: Centipede Game with Zero-Sum Payoffs
∗ Analyze the Centipede game modified to be a zero-sum game
∗ Discuss implications for subgame perfection
3. Static Games of Incomplete Information
• 3.1 Theory: Static Bayesian Games and Bayesian Nash Equilibrium
– 3.1.A Example: Cournot competition under asymmetric information
– 3.1.B Normal-form representation of static Bayesian games
– 3.1.C Definition of Bayesian Nash Equilibrium
– Fair Game Variant: Bayesian Zero-Sum Games
∗ Introduce zero-sum games with incomplete information
∗ Analyze the role of private information in fair games
• 3.2 Applications
– 3.2.A Mixed strategies revisited
– 3.2.B Auctions and bidding strategies
– 3.2.C Double auction mechanisms
– Fair Game Example: Fair Auctions
∗ Study auction designs where expected payoffs are equal
∗ Discuss fairness in bidding strategies
• 3.3 The Revelation Principle
4. Dynamic Games of Incomplete Information
• 4.1 Introduction to Perfect Bayesian Equilibrium
– Concepts and definitions
– Fair Game Variant: Signaling Games with Zero-Sum Payoffs
∗ Analyze signaling games where interests are directly opposed
∗ Discuss fairness and information transmission
• 4.2 Signaling Games
– 4.2.A Perfect Bayesian Equilibrium in signaling games
– 4.2.B Job-market signaling
– 4.2.C Corporate investment and capital structure
– 4.2.D Monetary policy
– Fair Game Example: Education Signaling with Equal Payoffs
∗ Modify the job-market signaling model to have fair outcomes
∗ Explore the implications for education and hiring
• 4.3 Other Applications of Perfect Bayesian Equilibrium
– 4.3.A Cheap-talk games
– 4.3.B Sequential bargaining under asymmetric information
– 4.3.C Reputation in the finitely repeated Prisoner’s Dilemma

3
 – Fair Game Variant: Fairness in Reputation Games
∗ Study reputation effects in games with fair payoffs
∗ Discuss the sustainability of cooperation
• 4.4 Refinements of Perfect Bayesian Equilibrium

5. Additional Topics (As time permits)

• Evolutionary game theory
– Fair Game Example: Evolutionarily Stable Strategies in Zero-Sum Games
∗ Explore ESS in the context of fair games
• Mechanism design and implementation
– Fair Mechanisms
∗ Design mechanisms ensuring fairness among participants

Grading Policy
• Homework Assignments: 20
• Midterm Exam: 30
• Final Exam: 50

Course Policies
Attendance
Attendance is expected for all lectures. Active participation is encouraged to enhance understanding.

Academic Integrity
Students are expected to uphold the highest standards of academic integrity. Collaboration is permitted on
homework, but submitted work must be individual and original. All sources must be cited appropriately.

4
Tentative Schedule
Week Topics Readings
1 Introduction to Game Theory Ch. 1
2 Mathematical Preliminaries: Sets, Appendices A & B
Probability, and Utility Theory
3 Normal-Form Games and Nash Ch. 2
Equilibrium (1.1.A - 1.1.C); Fair
Game Example: Matching Pennies
4 Iterated Elimination and Ch. 2
Dominance; Fair Game
Applications
5 Applications: Cournot and Ch. 3
Bertrand Models (1.2.A - 1.2.D);
Fair Game Variant: Zero-Sum
Duopoly Models
6 Mixed Strategies and Existence of Ch. 4
Equilibrium (1.3.A - 1.3.B); Fair
Game Example:
Rock-Paper-Scissors
7 Fair Games and Zero-Sum Games Ch. 7
(1.4)
8 Midterm Exam
9 Dynamic Games: Backwards Ch. 5
Induction (2.1.A - 2.1.D); Fair
Game Variant: Sequential
Zero-Sum Games
10 Subgame Perfection and Two-Stage Ch. 6
Games (2.2.A - 2.2.D); Fair Game
Example: Battle of the Sexes with
Equal Payoffs
11 Repeated Games and Applications Ch. 14
(2.3.A - 2.3.E); Fair Game Variant:
Repeated Zero-Sum Games
12 Extensive-Form Games and Ch. 7
Subgame-Perfect Equilibrium
(2.4.A - 2.4.B); Fair Game
Example: Centipede Game with
Zero-Sum Payoffs
13 Static Bayesian Games and Ch. 9
Bayesian Nash Equilibrium (3.1.A -
3.1.C); Fair Game Variant:
Bayesian Zero-Sum Games
14 Review and Final Exam
Preparation
15 Final Exam