ECON 484-A1 GAME THEORY AND ECONOMIC APPLICATIONS FALL 2017 Dr. Claudia M. Landeo Tory 7-25 landeo@ualberta.ca http://www.artsrn.ualberta.ca/econweb/landeo/ CLASS TIME This class meets on Tuesdays and Thursdays from 3:30 to 4:50 (T B 5). This is a 3-credit course. OFFICE HOURS My office hours are Thursdays from 5:30 to 6:30 p.m. Also, please feel free to contact me -- e-mail is best -- with questions. 1
COURSE DESCRIPTION This course presents the fundamentals of game theory, the study of strategic behavior among parties having opposed, mixed or similar interests. The course material is intended to sharpen your understanding of strategic behavior in encounters with other individuals and your assessment of strategic competition among firms. The class sessions include both traditional lectures and discussions of economic applications. The lecture topics will encompass abstract frameworks and theoretic approaches. The economic applications are selected for both their game-theoretic content and their policy relevance. The main course material is divided into four parts. The first part presents the basic frameworks for the analysis of strategic decision-making. The topics include strategic decision-making and a discussion of the elements that characterize a game. The second part is concerned with static games. Topics include (pure strategy) Nash equilibrium, mixed-strategy Nash equilibrium, and applications to oligopoly and contracts. The third part takes a view of dynamic games, considering the subgame perfect Nash equilibrium concept, bargaining settings, repeated games, and applications to collusion among firms and hold-up problems in contracts. The fourth part covers incomplete information settings, including Bayesian Nash equilibrium and Perfect Bayesian equilibrium concepts and applications. The prerequisites are ECON 384 and ECON 299. TEACHING METHOD The class will consist of a combination of lectures and class discussion. I expect students to come to class prepared. Student preparation of assigned materials and involvement in class discussion is essential for the success of the course. WEB PAGE Supplementary readings, learning points from class discussions, and other materials will be posted to the class web page (eclass). READINGS The textbook is Strategy: An Introduction to Game Theory, by Joel Watson, Third Edition, 2013, W.W. Norton & Company. This book is available in the bookstore. We will not be covering everything in the chapters listed in the course outline. Students are responsible only for the material covered in class. 2
GRADING AND REQUIREMENTS Requirements include a midterm exam (35%), a final exam (45%), and three written assignments (20%). The midterm exam will be given on Thursday, November 2. No make-up midterm exam will be provided. The final exam will cover the entire term s work and will be administered during the final exams week. In case of missing the midterm exam, the final exam will be worth 80% of the final grade. The three assignments are analytical and designed to reinforce the material from the readings and lectures. The exercises will provide students with the opportunity for feedback during the semester. The assignments should be turned in at the beginning of the class (due date). Under no circumstances late assignments will be accepted. ACADEMIC INTEGRITY It is assumed that students are familiar with the codes of academic integrity. Violation of these codes will result in a sanction. Collaboration on assignments is encouraged but students are expected to formulate and write their own solutions on assignments, quizzes and final exam. Requested paragraphs regarding academic integrity and course outlines follow. "The University of Alberta is committed to the highest standards of academic integrity and honesty. Students are expected to be familiar with these standards regarding academic honesty and to uphold the policies of the University in this respect. Students are particularly urged to familiarize themselves with the provisions of the Code of Student Behaviour (online at www.ualberta.ca/secretariat/appeals.htm) and avoid any behaviour which could potentially result in suspicions of cheating, plagiarism, misrepresentation of facts and/or participation in an offence. Academic dishonesty is a serious offence and can result in suspension or expulsion from the University." (GFC 29 SEP 2003) Policy about course outlines can be found in ' 23.4(2) of the University Calendar." (GFC 29 SEP 2003). AUDIO OR VIDEO RECORDING Audio or video recording, digital or otherwise, of lectures, labs, seminars or any other teaching environment by students is allowed only with the prior written consent of the instructor or as part of an approved accommodation plan. Student or instructor content, digital or otherwise, created and/or used within the context of the course is to be used solely for personal study, and is not to be used or distributed for any other purpose without prior written consent from the content author(s). 3
PART 1: BASIC FRAMEWORKS WEEK 1: THINKING STRATEGICALLY, ELEMENTS OF A GAME, AND PRIMER ON EXPERIMENTAL ECONOMICS 1. Games of Strategy: Introduction (Chapter 1). 2. The Extensive Form (Chapter 2). 3. Strategies and the Normal Form (Chapter 3). 4. General Assumptions and Methodology (Chapter 5). 5. A Primer on Experimental Economics 4
PART 2: STATIC SETTINGS WEEK 2: NASH EQUILIBRIUM, APPLICATIONS, AND MIXED-STRATEGY NASH EQUILIBRIUM 1. Nash Equilibrium (Chapter 9). 2. Oligopoly (Chapter 10). 3. Mixed-Strategy Nash Equilibrium (Chapters 4 and 11). WEEK 3: MIXED-STRATEGY NASH EQUILIBRIUM AND CONTRACTS 1. Mixed-Strategy Nash Equilibrium (Chapters 4 and 11). 2. Contracts Part 1: Enforcement (Chapter 13). 5
PART 3: DYNAMIC SETTINGS WEEK 4: SUBGAME PERFECT NASH EQUILIBRIUM AND APPLICATIONS 1. Subgame Perfect Nash Equilibrium (Chapter 15). WEEK 5: EXCLUSIVE DEALING CONTRACTS 1. Contracts Part 2: Barriers to Entry. Landeo, C.M. and Spier, K. (2009), Naked Exclusion: An Experimental Study of Contracts with Externalities, American Economic Review, pp. 1850-1877. WEEK 6: BARGAINING GAMES 1. Bargaining Settings (Chapter 18). 2. Ultimatum and Alternating-Offer Bargaining Games (Chapter 19). WEEK 7: REPEATED GAMES AND COLLUSION 1. Repeated Games (Chapter 22). 2. Collusion (Chapter 23). WEEK 8: INCENTIVE CONTRACTS FOR TEAMS 1. Contracts Part 3: Team Incentives Landeo, C.M. and Spier, K. (2015), Incentive Contracts for Teams: Experimental Evidence, Journal of Economic Behavior and Organization, pp. 496-511. 6
PART 4: INCOMPLETE INFORMATION SETTINGS WEEK 9: THE ROLE OF NATURE 1. Random Events and Incomplete Information (Chapter 24). WEEKS 10 AND 11: PERFECT BAYESIAN EQUILIBRIUM AND APPLICATIONS 1. Perfect Bayesian Equilibrium (Chapter 28). 2. Contracts Part 4: Business Deadlock Mechanisms. Landeo, C.M. and Spier, K. (2014), Shotguns and Deadlocks, The Yale Journal on Regulation. WEEK 12: BAYESIAN NASH EQUILIBRIUM AND APPLICATIONS 1. Bayesian Nash Equilibrium (Chapter 26). 2. Lemons and other applications (Chapter 27). WEEK 13: COURSE WRAP UP 7