Sequential games

Definition

Sequential games are a type of game in which players make decisions one after another, rather than simultaneously. This structure allows players to observe the actions of others before making their own choices, which can significantly influence the outcome of the game. The analysis of these games often involves constructing extensive form representations to understand the strategic interactions and potential payoffs involved.

5 Must Know Facts For Your Next Test

1. In sequential games, players can adjust their strategies based on the observed actions of previous players, making it crucial to think ahead.
2. The extensive form representation of sequential games helps visualize the order of moves and possible outcomes, aiding in decision-making.
3. Backward induction is commonly used to find subgame perfect equilibria by solving from the end of the game backward to determine optimal strategies at each stage.
4. Strategies in sequential games often involve commitment devices where a player can create a credible threat or promise based on their earlier actions.
5. These games are particularly relevant in competitive business settings where companies must respond to rivals’ moves, such as pricing strategies or product launches.

Review Questions

• How does the structure of sequential games affect players' strategic decision-making compared to simultaneous games?
  • The structure of sequential games significantly impacts decision-making because players can observe and react to the actions of those who move before them. Unlike simultaneous games, where players must make decisions without knowing others' choices, sequential games allow for strategic foresight. Players can adapt their strategies based on earlier moves, potentially leading to more informed decisions and different outcomes.
• Discuss how backward induction can be utilized in sequential games to derive optimal strategies for players.
  • Backward induction is a critical method in analyzing sequential games as it allows players to determine optimal strategies by reasoning backward from the game's final outcomes. By starting at the end of the game, players assess the best actions available at each decision point. This process helps identify subgame perfect equilibria, ensuring that each player's strategy is optimal at every stage of the game, given the choices made by others.
• Evaluate the implications of sequential games on strategic business decisions, particularly in competitive markets.
  • Sequential games have significant implications for strategic business decisions in competitive markets because they highlight the importance of timing and anticipation. Companies must consider not only their own strategies but also how competitors might react to their actions. This dynamic can lead to tactics like price undercutting or preemptive product launches. Analyzing these interactions through sequential game theory enables firms to craft strategies that account for potential responses from rivals, enhancing their competitive edge.

Related terms

Extensive Form Game: A representation of a game that displays the sequential nature of players' decisions using a tree structure, showing how choices lead to different outcomes.

Nash Equilibrium: A situation in which each player's strategy is optimal given the strategies chosen by others, meaning no player has an incentive to unilaterally change their strategy.

Backward Induction: A method used in sequential games to deduce backward from the final outcomes to determine optimal strategies at each decision point.