Table of Contents
1 Static Games of Complete Information 1
1.1 Basic Theory: Narmal-Form Games and Nash Equilibrium 2
1.1.A Normal-Form Representation of Games 2
1.1.B Iterated Elimination of Strictly Dominated Strategies 4
1.1.C Motivation and Definition of Nash Equilibriuin 8
1.2 Applications 14
1.2.A Cournot Model of Duopoly 14
1.2.B Bertrand Model of Duopoly 21
1.2.C Final-Offer Arbitration 22
1.2.D The Problem of the Commons 27
1.3 Advanced Theory: Mixed Strategies and Existence of Equilibriutn 29
1.3.A Mixed Strategies 29
1.3.B Existence of Nash Equilibrium 33
2 Dynamic Games of Complete Information 55
2.1 Dynamic Games of Complete and Perfect Information 57
2.1.A Theory: Backwards Induction 57
2.1.B Stackelberg Model of Duopoly 61
2.1.C Wages and Employment in a Unionized Firm 64
2.1.D Sequential Bargaining 68
2.2 Two-Stage Games of Complete but Imperfect Information 71
2.2.A Theory: Subgame Perfection 71
2.2.B Bank Runs 73
2.2.C Tariffs and Imperfect International Competition 75
2.2.D Tournaments 79
2.3 Repeated Games 82
2.3.A Theory: Two-Stage Repeated Games 82
2.3.B Theory: Infinitely Repeated Games 88
2.3.C Collusion between Cournot Duopolists 102
2.3.D Efficiency Wages 107
2.3.E Time-Consistent Monetary Policy 112
2.4 Dynamic Games of Complete but Imperfect Information 115
2.4.A Extensive-Form Representation of Games 115
2.4.B Subgame-Perfect Nash Equilibriuin 122
3 Static Games of Incomplete Information 143
3.1 Theory: Static Bayesian Ganies and Bayesian Nash Equilibrium 144
3.1.A An Example: Cournot Competition under Asymmetric Information 144
3.1.B Normal-Form Representation of Static Bayesian Games 146
3.1.C Definition of Bayesian Nash Equilibrium 149
3.2 Applications 152
3.2.A Mixed Strategies Revisited 152
3.2.B An Auction 155
3.2.C A Double Auction 158
3.3 The Revelation Principle 164
4 Dynamic Games of Incomplete Information 173
4.1 Introduction to Perfect Bayesian Equilibrium 175
4.2 Signaling Games 183
4.2.A Perfect Bayesian Equilibrium in Signaling Games 183
4.2.B Job-Market Signaling 190
4.2.C Corporate Investment and Capital Structure 205
4.2.D Monetary Policy 208
4.3 Other Applications of Perfect Bayesian Equilibrium 210
4.3.A Cheap-Talk Games 210
4.3.B Sequential Bargaining under Asymmetric Information 218
4.3.C Reputation in the Finitely Repeated Prisoners' Dilemnia 224
4.4 Refinements of Perfect Bayesian Equilibrium 233
Index 257