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In game theory and economics, a mechanism is called incentive-compatible (IC) [1]: 415 if every participant can achieve their own best outcome by reporting their true preferences. [ 1 ] : 225 [ 2 ] For example, there is incentive compatibility if high-risk clients are better off in identifying themselves as high-risk to insurance firms , who ...
A prototypical paper on game theory in economics begins by presenting a game that is an abstraction of a particular economic situation. One or more solution concepts are chosen, and the author demonstrates which strategy sets in the presented game are equilibria of the appropriate type.
If both A and B have strictly dominant strategies, there exists a unique Nash equilibrium in which each plays their strictly dominant strategy. In games with mixed-strategy Nash equilibria, the probability of a player choosing any particular (so pure) strategy can be computed by assigning a variable to each strategy that represents a fixed ...
If a strictly dominant strategy exists for one player in a game, that player will play that strategy in each of the game's Nash equilibria.If both players have a strictly dominant strategy, the game has only one unique Nash equilibrium, referred to as a "dominant strategy equilibrium".
In game theory, a solution concept is a formal rule for predicting how a game will be played. These predictions are called "solutions", and describe which strategies will be adopted by players and, therefore, the result of the game. The most commonly used solution concepts are equilibrium concepts, most famously Nash equilibrium.
Constant sum: A game is a constant sum game if the sum of the payoffs to every player are the same for every single set of strategies. In these games, one player gains if and only if another player loses. A constant sum game can be converted into a zero sum game by subtracting a fixed value from all payoffs, leaving their relative order unchanged.
In game theory terms, the players of this game are a leader and a follower and they compete on quantity. The Stackelberg leader is sometimes referred to as the Market Leader. There are some further constraints upon the sustaining of a Stackelberg equilibrium. The leader must know ex ante that the follower observes its action. The follower must ...
There are two general types of implementation problems: the economic problem of producing and allocating public and private goods and choosing over a finite set of alternatives. [2] In the case of producing and allocating public/private goods, solution concepts are focused on finding dominant strategies.