Assumptions and Keywords in Game Theory

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There are a number of assumptions in game theory; some of the assumptions identified by Varian (1992) can be explained as follows: we assume that the descriptions of the game (such as the payoffs and the strategies available to the players) are common knowledge. That is, each player knows his own payoffs and strategies, and the other player's payoffs and strategies.
Furthermore, each player knows that the other player knows this, and so on. We also assume that it is common knowledge that each player is "fully rational." That is, each player can choose an action that maximizes his utility given his subjective beliefs, and that those beliefs are modified when new information arrives according to Bayes' law.
Game theory can be considered as a generalization of standard, one-person decision theory. How should a rational expected utility maximizer behave in a situation in which his payoff depends on the choices of another rational expected utility maximizer? Obviously, each player will have to consider the problem faced by the other player in order to make a sensible and economically rational choice.
According to Varian (1992) the strategic form of the game is defined by exhibiting a set of players, a set of strategies, the choices that each player can make, and a set of payoffs that indicate the utility that each player receives if a particular combination of strategies is chosen.
As Baye (2010) observed, a normal-form game is a representation of a game indicating the players, their possible strategies, and the payoffs resulting from alternative strategies. A strategy is a decision rule that describes the actions a player will take at each decision point. That is, a strategy is a player’s planned decision. Examples of strategies that players in a game may…...

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