The Game Theory is used in experimental economics, though it can be used in a number of other social sciences. There are a number of critics that argue this theory cannot hold up since not all people present in the market economy are perfectly rational. However, there are ways to rule certain margins out. There is room for error in the experiments mentioned below. Certain studies even go into finding differences when it comes to the present data and the predicted outcome. There are ways to analyze why certain outcomes deviated from the expected results. This type of theory will help firms identify ways in which they can win the “prize”, which is market shares for the products they hold. Looking into theories present under this subject will help competitors understand their field and identify the behavior of consumers.
Stochastic Game Theory
The Nash equilibrium and it’s theories have contributed to the expanse of the game theory. Without this, a number of experiments will not have a reasonable outcome. This has given the game theory a central theme. It was first conceptualized when N-person games needed a solution concept and existing proof. This can work in certain card games, and it also works in market economies. One person’s gain can be another’s loss. A number of theories have revolved around this concept and game theory has grown because of this Nash equilibrium.
The game theory can be used in economy, social sciences, political sciences and other applications in the real world. However, it as experienced a lot of criticisms, being compared to the rational choice and other assumptions where perfect decision making are involved. This might be seen as flawed if you look into interactive behavior where other variables will not be seen.
The paper entitled Stochastic Game Thoery: for playing games, not just for doing theory describes the theories present in experimental economics. It explains how they came around at the other uses for them. This interesting paper is for those who have little or no knowledge about experimental economics or the game theory. It presents well known theories in experimental economics and the different criticisms they have undergone. It brings in different viewpoints and even social dilemma games where the Nash equilibrium has been tested.
The introduction had a good ounce of history which explained the need for the Nash theory which in all papers mentioned below. It is an important part of the game theory and has been a centralized theme of experimental economics. The paper is very well written, going from the basics to formulas involved in things such as coordination games and social dilemmas. It presents the theory as just an idea. It gives readers freedom to judge the theory by itself without using it in a situation first.
The criticism for theories is also presented to give an unbiased viewpoint for them. The paper is very useful and can be introduced to those who are first learning about economics. Theories are even presented in a way where they can be used in other subject areas. Different viewpoints and ample examples are given to give readers deeper understanding for the theories. The founders of theories and people who coined specific terms are given their due credit in this paper; this is a good introductory piece. The game theory can be well understood with a paper written in this manner.
A number of theories mentioned below are discussed in this paper. It is only a gist of the things you might encounter with the game theory. This is very useful for learning about experimental economics. Knowing the basics of theories and why they exist allows readers to incorporate this way of thinking in other experiments.
Noisy Equilibrium Behavior
A number of economic situations are seen to have payoffs which are determined by the decision of all agents. This can be put in the example of a homogeneous product, the sales of a certain firm will depend on the lowest price posted for that product. If there is an absence of capacity constraints and imperfect or incomplete information about the product the firm that posts the lowest price will get all sales as well as the Bertrand outcome results. The paper entitled Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition studies price competition with the assumption that the firm that holds the lowest price for a certain product receives a larger bulk in the market share. However, in this set up, the higher price share is not equal to zero, unlike in the common Bertrand setup.
The literature review introduces the Bertrand paradox regarding the structure of the industry and the assumptions about behavior of pricing. The approach includes product differentiation, how consumers learn about costs and trigger price strategies. However, this approach would be one dimensional if other options were not looked into. The second approach to the paradox involves the assumption of perfect rationality. In this approach, it is assumed that deviations will not occur if the gain or profit is not great.
The paper showed a great understanding for the theories presented. The literature review explained the need for the experiment well and dug in deeper in terms of the paradox. Readers are able to picture the structures that were presented in the paper. It was generally easy to read and the theories presented were very reasonable. Nothing was too extreme and it can be put in terms of reality. This experiment can be seen as something that would really happen with firms and their pricing strategies. It would come useful to those that sell very competitive products such as household cleaning agents. Firms that have these products will be able to learn the pattern or behavior of buyers in the market with a study like this. The model presented for noisy equilibrium behavior was concise, making use of very basic rules in economics. This was presented very in a very straightforward manner which was backed up with the literature review.
Decision making patterns of consumers can be noted and directly related to a paper like this. Recommendations for the paper included more experiments which calls for deeper understanding of the theories presented. Generally, the experiment showed a very promising way of finding out how you can increase earnings for certain products. This type of experiment will be very helpful for firms that would like to go into market research for their products.
Logit Equilibrium Models of Anomalous Behavior
Many experiments will have very unexpected results. In terms of economic experiments, it might be possible that a researcher will come across a situation when the baseline treatments will come out just as how the Nash equilibrium predicts them to be. However, there might be some changes in certain parameters that will alter these results and force them not to conform to the original prediction of the Nash. The changes in behavior or strategies will alter the probabilities, but it will not necessarily change the equilibrium itself. If random elements were to be introduced, they might be interpreted in different ways into the equilibrium analysis.
The background of the experiment presented in the paper entitled Logit Equilibrium Models of Anomalous Behavior: What To Do When The Nash Equilibrium Says One Thing And The Data Say Something Else is the logit approach. This comes with the idea of a bounded rationality where agents are bound in certain environments for a long tim, limiting their ability to evaluate the things that are around them. The decision areas in non-cooperated games are identified and explained. This theory was not present until two decades ago. The formula was broken down and explained piece by piece. This paper directly relates to the one discussed above because it can show error in assumptions. It is a bit more difficult to understand and has a deeper level of though in it. Instead of just looking at experiments for how they are, mistakes and things that might be overlooked are taken into consideration.
Choices and response of agents are looked into deeper with this experiment. A number of variables can change the outcome of the experiment. It is important that all things in regards to the decision making are scrutinized as so all flaws or variables are seen. The paper discusses the process of looking for a logit equilibrium, giving an ample number of examples. Readers are given the change to calculate for themselves in order to have a hands-on experience in regards to the experiment. This paper is meant to be for those who understand different game theories and price competitions. It does not go in deeper certain theories and expects the reader to be familiar with experimental economics. However, for those who are familiar with the subject, good examples are given and it is explained well.
A paper like this would be good for those studying changes in results when the equilibrium remains the same. Not a lot of researchers take into account the different variables or choices that could have changed the results of the game. A concise example was given in the paper; this could also be used in a number of different contexts in economics. There are patterns seen in the results when all perspectives are taken into account. The paper states that there are a number of things that do not correspond to the expected outcome. Flaws in data can be traced back and the theory of anomalous behavior can be used to identify the deviations in certain experiments. The Nash equilibrium is something that would need further study because it can be used in a number of economic theories and can help a lot of firms.
Rent Seeking With Bounded Rationality
The paper entitled Rent Seeking with Bounded Rationality: An Analysis of the All-Pay Auction is about the logit formulation. This focuses on the bid distribution of the equilibrium as fixed where the payoffs are determined by distributions through the firms’ expected payoffs. This is where the economy believes that prizes are allocated depending on the firms with the most costly activities. Meaning, the more you put in, the more you get out. This also goes the same for those who wait the longest will be rewarded also. This is where the losers do not get compensated for their efforts, the winner takes all.
The literature on this paper shows studies that revolve around prize gaining. This is where the firm’s profit is determined by the effort exerted. The prize is always awarded to the competitor that spends more, waits longer and tries the hardest. This is called an all-pay auction where monetary bids are given and competitors can be ranked by the amount they played. The prize in auctions always goes to the one that bids the highest. Everyone is given an equal opportunity and a positive play-off. Strategies are seen as mixed and there is full distribution in terms of rent.
The experiment consists of bounded rational players and the equilibrium should be fully analyzed. The paper focused more on probability, strategy and fair play. Instead of viewing the decisions of firms and their actions, it focuses more on the rules set in the market. Everyone has an equal opportunity to gain the prize available, and it is up to the competitors how they play the game.
A model is given to show readers how an experiment like this can work. Not much formulas are seen in this paper as it focuses mostly on theories. This paper is found to rely on theory rather than solid examples. It can work in a real life scenario when it comes to small firms and tight competitions, but it is not a solid basis for an entire economy to run on. The literature and information is presented in a neat and understandable manner, yet it does not seem to be as solid as other papers. This kind of theory might not work for all scenarios and it is more of an idea.
The Nash Equilibrium is also presented in this paper. It is seen as a limiting case here for the paper as it only allows for small deviations. The paper reviewed above can also be used to see flaws in experiments conducted using these theories. A number of variables with the pay-all auction theories can be changed, depending on how competitors approach the game. The outcome could be dissected using the theory of logit, yet keeping mind that the Nash equilibrium still does provide reasonable predictions.
Ten Little Treasures of Game Theory and Ten Intuitive Contradictions
Many games in the laboratory are played multiple times so that the researcher can find variables between the games and suggest why outcomes differed. However, there are certain games that are to be played only once. The paper entitled Ten Little Treasures of Game Theory and Ten Intuitive Contradictions shows the outcome of games played. The treasure portion are those games that conform well with the desired outcome of the researcher, and the contradictions are those that differed from the Nash equilibrium.
The paper shows that there is no absolute when it comes to experiments, yet there are reasons for deviations. Like the paper entitled Logit Equilibrium Models of Anomalous Behavior: What To Do When The Nash Equilibrium Says One Thing And The Data Say Something Else, this paper studies the deviances in certain experiments. These are mostly caused by unexpected decision making from other people.
The Nash Equilibrium is a theoretical construct that is used almost as much as supply and demand in the realm of experimental economics. This is something that has been applied to other types of sciences in order to find stable outcomes. However, there are other games with incomplete information that can differ in their results.
The literature of the paper focuses more on the theory of the Nash Equilibrium. The author presents all arguments very well and it is laid out in a way that is easy to understand. The scenarios given are easier to understand as compared to the paper entitled Logit Equilibrium Models of Anomalous Behavior: What To Do When The Nash Equilibrium Says One Thing And The Data Say Something Else.
The information shown in this paper is almost identical to the paper written on the same subject, yet t goes into the theory more rather than finding a formula to solve such deviations or anomalies. This is mostly because the paper focuses on one-shot game experiments where internal conflicts can result in different outcomes. There is no way of controlling certain variables for these types of experiments. It is seen that this type of theory is realistic since most things in life are one-shot games. It allows the researcher to abstract theories and lessens manipulation within the experiment. There is no way to change behavior, preferences or beliefs since it is only played once. This type of theory can be used for a number of things in experimental economics and should be consider as something firms and competitors use to find effective approaches for gaining market share.
Anderson, Simon P., Jacob K. Goeree, and Charles A. Holt “Logit Equilibrium Models of
Anomalous Behavior: What to Do when the Nash Equilibrium Says One Thing and the
Data Say Something Else,” Handbook of Experimental Economics Results (1998), edited
by C. R. Plott and V. L. Smith, New York: Elsevier Press, forthcoming.
Anderson, Simon P., Jacob K. Goeree, and Charles A. Holt “Rent Seeking with Bounded
Rationality: An Analysis of the All Pay Auction,” Journal of Political Economy, (1998)
Anderson, Simon P., Jacob K. Goeree, and Charles A. Holt “Stochastic Game Theory:
Adjustment and Equilibrium with Bounded Rationality,” University of Virginia, (1997)
Capra, C. Monica, Jacob K. Goeree, Rosario Gomez, and Charles A. Holt . “Learning and
Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition”,
University of Virginia, Discussion Paper (1998)., presented at the Conference of
Economics in Osaka, 1999.
Goeree, Jacob K., and Charles A. Holt. “Ten Little Treasures of Game Theory, and Ten Intuitive
Contradictions,” University of Virginia (1999), Discussion Paper.