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Strategic Game Theory (ECN3667) Summer 2019 Professor John Korsak Office Hours: Tuesday 10:00 – 11:30 (or by appointment) Westgate 104

The two texts for the course are: Games of Strategy, Dixit, Skeath and Reiley, 4th edition, W.W. Norton Company. This will be our primary textbook. Most in-class discussions will start with this material. Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life, Dixit and Nalebuff, W.W. Norton Company. This is an optional supplemental book. It tends to have different applications and examples. While you may find some repetition between the two books this is a good way to reinforce what you read in Games of Strategy. The in-class midterm examination is scheduled for June 10. The final exam is currently scheduled for July 3. Please note that schedules do change - it may be useful to wait before scheduling travel plans. There will be five problem sets. The weights for the assignments are as follows: Midterm Exam Reflections/Homework/Professionalism Project Assignment Final Exam Experimental Games

30% 25% (total) 15% 30% -10% - 0%

I will be posting class materials on Blackboard. Expectations The Honor Code - The standards and expectation of the Babson Honor Code and its academic honesty and integrity policies apply to this course as well as to any other course you are taking here. The policy is articulated in your Undergraduate Handbook. Failure of any student to take appropriate steps to fully understand the Code will not be an acceptable nor tolerated excuse for any violations. Attendance – I will be taking attendance for each class. If you are ill or have an extenuating circumstance, please email me to let me know. Class Preparation – a) Make sure you have looked over the reading and pay special attention to the “Key Terms” highlighted in bold in the reading and listed at the end of the chapter.

Class Participation – The best way to participate is to ask questions, both about the economic concepts we are learning and about their application to real world situations. If you have a question, I am sure a good number of your classmates have it too, and everyone will appreciate your raising it. Laptop Use in Class – Highly discouraged. If you are using a laptop, expect to be called on. Homework – The problem sets are designed to help you review, understand and apply the material we cover in class. Homework is graded liberally with the majority of the grade based on effort. You are encouraged to collaborate on homework but copying is a violation of the Honor Code. A good rule is to discuss the homework in groups but to writeup the answers on your own. You may type or hand write the assignments but it must be neat and legible. Consider all assignments that are turned in to be professional documents. They will be graded as such. Homework is due at the beginning of the class indicated on the schedule. Late assignments will not be accepted. Missed Assignments – There are no make-up assignments. Any missed assignment will receive a grade of zero. In special circumstances a petition for a missed exam can be submitted to the Office of the Class Dean. An approved excuse for an exam will result in a makeup exam being scheduled. In all but extreme and rare circumstances excuses should be submitted in advance. An approved excuse for other assignments will cause that assignment not to be counted and the other assignments being weighted more heavily. Please note: travel plans are not a valid excuse – do not schedule any travel until after all exams are complete. Accommodations - Any student who feels he or she may need an accommodation based on the impact of a disability should contact me privately and in a timely fashion to discuss his or her specific needs. Students must also contact Disability Services at 781-239-4508 or in Hollister Hall to coordinate reasonable academic accommodations. Exams: There will be one midterm exam and a comprehensive final exam. A conflict with travel arrangements is not a valid excuse. A missed exam will receive a grade of zero. All exams are closed book, closed notes. You should plan on having your own calculator available. (see the policy on missed assignments) In Class Work: Your participation in class is essential to the success of the class. We will have discussions of current topics and applications of the material we are covering. Both the quantity and the quality of participation are important. Therefore, it is beneficial to come to class prepared, having read the material beforehand. Throughout the semester we will have in-class experimental games. Your performance in a game is not graded but your participation is mandatory. Failure to participate in the games can negatively impact your grade, up to -10%. Any class may be recorded and posted to blackboard. Each classroom has a slightly different layout but the front row is more likely to be in the line of sight. If you have concerns with possibly being on camera please see the instructor at the beginning of the semester. Recorded content is never shared outside of Babson. Reflections: Throughout the class, especially after in-class games, you may be asked to write a reflection. These are designed to get you thinking about the concepts underlying the games we play. These should be short, concise papers about a page in length (excluding exhibits). Details will be provided in class for each paper. You should expect about 4 or 5 of these during the semester.

Problem Sets: The problem set due dates that are on the class schedule are dependent upon covering all of the material in class. Updates to the schedule will be announced in class. The problems will be a combination of problems from the book and outside problems related to the chapters covered. The assignments will be handed out in class a week before the due date. Homework is a learning exercise and it can be very helpful (and highly recommended) to work with classmates. However, you must turn in your own work in your own words. Work that is not your own will not be accepted and may be reported as an academic integrity violation. It is sometimes difficult to separate work done in a group setting, therefore, it may be helpful to discuss the problems in a group and then writeup your answers alone. Problem sets are graded on effort, accuracy and professionalism - it is always better to try a problem even if you cannot completely solve it and illegible or difficult to read problems may not be graded. Team Project: The team project is a capstone to the class and consists of finding a topic or situation where you can use the tools of game theory to understand the issue. The topic must include strategic interaction between players (simultaneous, sequential or a combination). The analysis should include game trees, payoff matrices or decision trees as appropriate. You will work in groups of 3 or 4. You may request your own groups and I will try to honor as many requests as possible. The team project consists of two parts, a written paper and a group presentation in the last few classes. You will be asked to evaluate yourself and your team mates as part of the project. Project specifics will be posted to blackboard. How to Be Successful Besides the usual advice about being prepared and keeping up with the readings and homework, it is important to keep in mind that everything in this class is cumulative – what is learned each class is used in following classes. If anything seems unclear to you, please ask questions in class, talk to me or email me – especially during the first few weeks. Class Schedule - Topics A class schedule of topics and various due dates has been posted to Blackboard (and is at the end of the syllabus). The schedule lists the topic that will be discussed in each class. Most lecture material will be drawn from Games of Strategy (GoS). The readings from Thinking Strategically (TS) will be used to apply and understand the general concepts presented in Games of Strategy. Please come to class having read all of the assigned material. We will not cover every detail of the readings in class, therefore, if you have questions on the reading you should ask in class or talk to the professor. The tentative due dates for the problem sets and the term project are listed on the schedule. Topic: Defining a Game Learning Objectives: By the end of this session, you should be able to: • Understand the difference between a game and a decision. • Use the five characteristics to define a game. • Understand that a strategy is a complete plan of action for a game. • Explain why game theory is or is not applicable to analyzing a particular situation.

Discussion Questions: – What separates Game Theory from SME Microeconomics? – Why is Game Theory not often used to analyze pure competition and monopoly? – If most components of a strategy go unused why do we need to specify them? Assigned Materials: GoS: Chapter 1, Chapter 2 TS: Chapter 1 (optional)

Topic: Sequential Games Learning Objectives: • Be able to explain what each node in a game tree represents. • Be able to construct a game tree given a narrative explanation of a game. • Use backwards induction (“rollback”) to predict the outcome of a sequential game. • Understand a rollback equilibrium as a set of strategies. • Be able to articulate why a player does or does not have a deviation incentive. • Use an equilibrium to describe a set of strategies with no deviation incentive. Discussion Questions: – How do we represent the consequences of a particular choice in a game? – What happens if two choices have the same payoff? – What happens if there are multiple equilibria? – How should we define winning? – What does it mean if one player has an “advantage?” Assigned Materials: GoS: Chapter 3 TS: Chapter 2 (optional) Topic: Simultaneous Games Learning Objectives: • Use a game table to describe the strategies and payoffs of players that move simultaneously. • Explain the Nash Equilibrium concept. • Use Best Response to find the equilibria. • Use iterated dominance to simplify games • Identify a game as a “Prisoners' Dilemma” • Explain why a game is a Prisoners' Dilemma. What are the characteristics? Discussion Questions: – If a game has dominant/dominated strategies must it be dominance solvable? – How is a Nash Equilibrium similar to a rollback equilibrium? – How is a Nash Equilibrium different from a rollback equilibrium? – Why are Prisoners' Dilemmas so common in the world around us? – Looking forward, are there ways to improve outcomes in Prisoners' Dilemma type games?

Assigned Materials: GoS: Chapter 4 TS: Chapter 3 (optional)

Topic: Continuous Strategies/Payoffs Learning Objectives: • Use an equation to describe a game with continuous payoffs/strategies. • Understand the difference between sequential and simultaneous games when payoffs/strategies are continuous. • Demonstrate deviation incentives (or lack thereof) in continuous games. • Use partial derivatives and/or algorithms to find best response functions. • Use best response to find equilibrium strategies. Discussion Questions: – When is it appropriate to use a continuous payoff? – In practice how do we use this concept? – Is it practical to think about demand equations to set prices? – Do firms behave in a way that is consistent with the theory? Assigned Materials: GoS: Chapter 5

Topic: Multi-stage Games Learning Objectives: • Use simultaneous and sequential concepts to describe games that have multiple components. • Define strategies that have simultaneous and sequential components. • Use backwards induction/ rollback, Nash Equilibrium and Best Response to predict outcomes and strategies. • Use game trees, game tables and narratives to describe multi-stage games. Discussion Questions: – What are some examples of multi-stage games? – Under what conditions is it beneficial to move first? second? – How can we model and analyze a game with two simultaneous components? Assigned Materials: GoS: Chapter 6

Topic: Mixed Strategies Learning Objectives: • Define a mixed strategy. • Understand what an “exploitable” strategy is and why that is undesirable. • Find “unexploitable” mixed strategies by equating expected payoffs. • Find a mixed strategy nash equilibrium using utility maximization. Discussion Questions: – If the other player does not use the equilibrium mixed strategy how should you respond? – What are some difficulties in applying mixed strategies? – What would a Mixed Strategy Nash Equilbrium look like in a business setting? – Looking forward, how does a mixed strategy relate to risk? Assigned Materials: GoS: Chapter 7 TS: Chapter 7-8 (optional) Topic: Uncertainty Learning Objectives: • Use utility functions to define and derive payoffs. • Use utility functions to model player characteristics such as risk aversion, altruism, fairness and social norms. • Understand why the square root function can be used to model risk aversion. • Identify asymmetric information in a game. • Use information sets to include asymmetric in the model of a game. • Estimate a player's willingness to pay in order to reduce risk. Discussion Questions: – How could we estimate a utility function or level of risk aversion? – What makes a game “fair” or “unfair”? – Are firms risk neutral? Should they be? Assigned Materials: GoS: Chapter 8 TS: Chapter 6 (optional)

Topic: Strategic Moves Learning Objectives: • Understand common strategic moves such as threats, promises and commitments. • Identify games where strategic moves would be useful (or not). • Identify ways to create reliability and trust. • Understand the difference between signaling and screening. • Explain the impact of asymmetric information on the expected payoffs of a game. Understand how strategic moves can be used to change the expected payoffs.

Discussion Questions: – What are common signaling and screening devices in the job market? – Why are these needed? – What are the benefits/pitfalls of these devices? – What are some situations where you have encountered asymmetric information? What potential impact did it have on you and other players? How did you deal with it? Assigned Materials: GoS: Chapter 9 TS: Chapter 5 (optional)

Topic: Repetition Learning Objectives: • Calculate present value and future value for finitely and infinitely repeated games. • Understand contingent strategies. • Explain and apply Grim Trigger and Tit-For-Tat strategies to repeated games. • Find deviation incentives in repeated games. • Use present value and indifference to find equilibrium strategies. Discussion Questions: – What is an appropriate discount value for future payoffs? – Why will discount values differ among individuals and firm? Assigned Materials: GoS: Chapter 10 TS: Chapter 4 (optional)

Topic: Collective Action Learning Objectives: • Use marginal analysis to predict equilibrium strategies when many players are involved. • Determine deviation incentives using marginal cost and marginal benefit. • Find net benefit maximizing outcomes. • Use strategic moves to align individual incentives with socially-optimal outcomes. Discussion Questions: – Why are bystander laws necessary? – What are ways to change individual incentives? – Why do colleges have student fees instead of per use fees? Assigned Materials: GoS: Chapter 11 TS: Chapter 9 (optional)

Topic: Mechanism Design Learning Objectives: • Understand different types of price discrimination. • Use mechanism design to identify opportunities for price discrimination. • Identify minimum bonus levels that would be needed to incentivise employee behavior. • Create incentive compatibility constraints and participation constraints. • Use incentive compatibility constraints to find points of indifference. • Identify conditions that would lead to pooling and/or separating equilibria. Discussion Questions: – Why is CEO compensation often significantly higher than the average pay within a company? – Why is the CEO compensation package at large public firms complicated (often taking up 20+ pages in the proxy statement). – What are the ethical considerations of price discrimination? When is price discrimination “good” or “bad”? Assigned Materials: GoS: Chapter 13 TS: Chapter 12 (optional)

Topic: Voting – Group Decision-making Learning Objectives: • Identify common voting methods such as Condorcet, Borda, and Plurality. • Identify opportunities for voting strategically. • Apply common voting techniques to strategic situations. • Predict expected outcomes given different methods of voting. Discussion Questions: – What makes a “good” voting method? – Which of Arrow's goals are you willing to sacrifice? – How can all individuals having transitive preferences yield votes that are not transitive? Assigned Materials: GoS: Chapter 15 TS: Chapter 3 (optional)

Topic: Bidding Learning Objectives: • Understand the “Winner's Curse” • Explain why/when bidding below your valuation would be an optimal strategy. • Identify common auction methods: English Ascending, Dutch, Silent, First-Price, Second-Price.

Discussion Questions: – What is the role of psychology in bidding? – What method is best for the seller? Buyer? – Why are contracts frequently awarded using a sealed bid method? Assigned Materials: GoS: Chapter 16 TS: Chapter 10 (optional)

2019 Summer Schedule of Classes ECN3667 GoS – Games of Strategy, TS – Thinking Strategically Date

Topics Reading(s) due that day Wed, May 22 GoS 1-3, TS 1-2 Introduction, examples of games GoS 2 Decisions vs. Games, types of games Sequential moves, game trees, order of action, rollback Fri, May 24 GoS 4, TS 3 Simultaneous moves, best response, Nash equilibrium, dominance Wed, May 29 GoS 5 Continuous payoffs, partial derivatives Fri, May 31 GoS 6 Combining sequential and simultaneous moves Mon, Jun 3

GoS 7, TS 7-8

Wed, Jun 5

GoS 8, TS 6

Mon, Jun 10 Wed, Jun 12 GoS 9, TS 5 Mon, Jun 17 GoS 10, TS 4

Mixed strategies for simultaneous moves, probability and expected value Uncertainty, information, credibility and commitments Midterm Exam – Chapters 1-7 Strategic moves, threats, promises, commitments Prisoner's Dilemma, repetition

Wed, Jun 19 GoS 11, TS 9 Collective action, cooperation Fri, Jun 21 GoS 13, TS 12 Mechanism design, incentives Mon, Jun 24 GoS 13 cont. Wed, Jun 26 Mon, Jul 1 Wed, Jul 3

GoS 15-16, TS 10

Bidding, voting Review Presentations & Review Cumulative Final Exam Currently scheduled for: July 3, 10:30 – 12:30

Assignments Due

PS 1 GoS 1-3 PS 2 GoS 4-5 PS3 (not graded)

PS 4 GoS 8-9

PS 5 GoS 10-13

Term Papers Due...