Game Theory: Key Terms

Backward induction: The procedure of solving an extensive-form game by first considering the last mover’s decision in order to deduce the decisions of all previous movers.

Best response: A strategy of a player is a best response to the strategies of the others in the game if, taking the other players’ strategies as given, it gives her greater payoffs than any other strategy she has available.

Commitment: The ability to choose and stick with an action that might later be costly.

Dominant strategy: The best response to every possible strategy of the other player(s).

Dominant strategy equilibrium: A combination of strategies is a dominant strategy equilibrium if the relevant strategy for each player is a dominant strategy.

Extensive-form game: A representation that specifies the order of play in a game.

First-mover advantage: A game has a first-mover advantage when the first player to act in a sequential game gets a benefit from doing so.

Game theory: The study of strategic interactions.

Game tree: An extensive-form representation of a game.

Mixed strategy: A mixed strategy involves choosing different actions randomly.

Nash equilibrium: A strategy combination is a Nash equilibrium if each strategy is a best response to the strategies of others.

Payoff matrix: Represents the payoffs for each action players can take.

Pure strategy: A pure strategy involves always choosing one particular action for a situation.

Simultaneous-move games: In simultaneous-move games, players pick their actions at the same time.

Zero-sum game: In a zero-sum game, one player’s loss is another’s gain, so the sum of the payoffs is zero.