MECO 6355.

Game Theory
Instructor. Gary Bolton
Jindal School of Management, Office 3.612
http://www.utdallas.edu/~gbolton/, gbolton@utdallas.edu
Office Hrs: Mon & Thur 3:30-5pm
Description. Many business and economic institutions can be thought of as a game.
Players in the game interact in pursuit of their interests according to the institutions
rules. Game theory is a set of tools for understanding and forecasting these interactions.
The goal of this class is to provide you with a working knowledge of game theory tools
such that you can understand how they are used in others research work and are able to
employ these tools in your own research.
Each module of this class will focus on a particular tool. Each module will introduce new
tools. We first discuss the concept behind the tool and how it works. We then analyze a
selection of important game theory models that illustrate how the tool gets applied.
Models will be taken from across the business school and economics curriculum; ex.,
bargaining, auctions, information economics, supply chain management, cooperative
behavior, reputation building, and market coordination. Enrolled students are encouraged
to nominate models they would like to see covered.
Game theory has inspired a rich and growing empirical literature on strategic behavior
regarding the objectives that motivate people and the cognitive limitations that bound
strategic behavior that has reverberated to influence the development of game theory
models. This literature, while not the central concern of this class, will be part of the story
we tell.
Pre-requisites. I assume you have a graduate school level understanding of
microeconomics and especially of expect utility theory. If not, please talk to me before
you enroll. If you are a masters degree student, you must talk to me before you enroll.
No previous exposure to game theory is assumed.
Required book. Game Theory for Applied Economists by Robert Gibbons. Princeton
University Press, 1992. Available in both hard and electronic copy.
Problem set rules. Problem sets are periodically assigned for hand-in and grading.
Grappling with the problems is a key part of mastering the tools we will study. For this
reason, do not consult any outside sources for answers to the problems. There is only one
exception: You may discuss the problems among yourselves. But even then, turn in your
own work; i.e., no copying somebody else's stuff. Failure to comply with these rules will
result in a grade of F for the course.
The same kind of questions will be asked on the exams. So if you understand the
solutions to the problem sets you will be in good shape; if not you won't.

Housekeeping. Your grade is a weighted average of the mid-term exam (30%), the final
exam (30%), problem sets (30%) and class participation (10%). The final and mid-term
exams will be open notes, open book. The class participation portion of your grade is
determined by participation in class discussions and class exercises/simulations.
The final grade distribution will be determined at a later date. However, a score of at least
90% guarantees you at least an A-, a score of at least 80% guarantees you at least a B-, a
score of at least 70% guarantees you at least a C.
See this link for UT Dallas Syllabus Policies and Procedures.
Course outline (Applications may change depending on class interest.)
1. Preliminaries: Choice under uncertainty/risk. Expected utility theory.
Module 1. Static games of complete information
2.

Games in normal form. The common knowledge assumption. Dominance and

iterative dominance. Prisoners dilemma, public goods, guessing game.

3. Nash equilibrium. Cournot-Nash and Bertrand games, Coordination game. Demo of

reaction function technique. Final offer arbitration.
4. Mixed strategies. Equilibrium existence and uniqueness. Rock-paper-scissor, battleof-the-sexes. Controversy about mixed strategies.
Module 2. Dynamic games of complete information
5. Extensive form games and subgame perfection. Backward induction technique.
6. Bargaining: Two by Nash, Zeuthen and arbitration, Sequential bargaining games.
7. Repeated games and reputation building.
Module 3. Static games of incomplete information
8. Bayesian Nash equilibrium
9. Auctions 1: Private and common valuations. Revenue equivalence, Winner's curse.
10. Auctions 2: Auctions in procurement. Online auctions.
Module 4. Dynamic games of incomplete information

11. Perfect Bayesian equilibrium

12. Signalling and cheap talk models
13. Social preference theory.