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Game theory is useful whenever there is strategic interaction, whenever how well you do depends on the actions of others as well as your own choices.
backward induction: you can figure out your opponent’s response to your possible actions and take that into consideration before making your own move.
Human behaviour is probably better approximated by bounded rationality. That is, human rationality is limited by the tractability of the decision problem (how easy it is to manage), the cognitive limitations of our minds, the time available in which to make the decision, and how important the decision is to us.
The idea of Nash equilibrium is both simple and powerful: in equilibrium each rational player chooses his or her best response to the choice of the other player. That is, he or she chooses the best action given what the other player is doing.
The game illustrates the difficulty of acting together for common or mutual benefit given that people pursue self-interest.
An outcome is Pareto efficient if there is no other potential outcome where somebody is better off and nobody is worse off.
What consumers need is a way to infer which firms are offering high-quality products, and which are not. Of course, a firm has every incentive to claim that its product is of high quality, whether it is or not. So, direct statements by the firm have no value.
Game Theory for Applied Economists,
