Sequential games

Definition

Sequential games are a type of game theory where players make decisions one after another, rather than simultaneously. This setup allows for the possibility of observing the actions of previous players before making one's own decision, which can significantly influence the outcomes. The strategic considerations in sequential games often involve anticipating the future actions of other players, leading to the use of concepts like backward induction to determine optimal strategies.

5 Must Know Facts For Your Next Test

1. In sequential games, players take turns making decisions, which allows them to react to earlier moves made by their opponents.
2. The concept of backward induction is essential in sequential games, as it involves reasoning backward from the end of the game to deduce optimal moves at each stage.
3. Sequential games can be represented using an extensive form game tree, where nodes represent decision points and branches represent possible actions.
4. These games are common in business strategy situations, such as pricing decisions or negotiations, where firms must consider competitors' potential reactions.
5. An important aspect of sequential games is that they can lead to different equilibria depending on how players anticipate each other's moves over time.

Review Questions

• How does backward induction apply to sequential games and why is it important for players when making decisions?
  • Backward induction is a crucial technique in sequential games because it allows players to evaluate potential future outcomes based on current decisions. By reasoning from the end of the game backwards, players can identify their best strategies at each stage. This approach helps players understand how their choices might influence subsequent moves by other players, ultimately leading to more informed and strategic decision-making.
• Discuss how sequential games differ from simultaneous games and the implications these differences have for business strategy.
  • Sequential games differ from simultaneous games primarily in the timing of player decisions. In sequential games, players can observe prior actions before making their own choices, allowing for strategic responses. This difference has significant implications for business strategy because firms can tailor their decisions based on competitors' moves, leading to outcomes that are contingent on observed behavior. For example, in pricing strategies, a company may lower its prices only after seeing a competitor's price drop.
• Evaluate the significance of understanding sequential games in competitive business environments and how firms can leverage this knowledge for strategic advantage.
  • Understanding sequential games is vital for firms operating in competitive environments because it equips them with insights into how competitors may react to their actions. By leveraging knowledge of sequential game dynamics, companies can anticipate rival responses and strategically plan their moves to maximize payoffs. For instance, a firm might engage in price wars or product launches while considering not just immediate gains but also long-term effects on market positioning. This strategic foresight enables businesses to navigate complex interactions and make better-informed decisions that align with their overall objectives.

Related terms

Backward induction: A method used to solve sequential games by analyzing the game from the end to the beginning, helping players determine optimal strategies based on the expected actions of others.

Nash equilibrium: A concept in game theory where no player can benefit by changing their strategy while the other players keep theirs unchanged, applicable in both simultaneous and sequential games.

Extensive form game: A representation of a game that specifies the order of play, available strategies for each player, and payoffs for each possible outcome, often used to analyze sequential games.