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Contents I General Materials 7 II Chapter-Speci c Materials 12 1 Introduction 13 2 The Extensive Form 15 3 Strategies and the Normal Form 18 4 Belief s, Mixed Strategies, and Expected Payo s 21 5 General Assumptions and Methodology 23 6 Dominance and Best Response 24 7 Rationalizability and Iterated Dominance 27 8 Location, Partnership, and Social Unrest 29 9 Nash Equilibrium 32 10 Oligopoly, Tari s, Crime, and Voting 34 11 Mixed-Strategy Nash Equilibrium 35 12 Strictly Competitive Games and Security Strategies 37 13 Contract, Law, and Enforcement in Static Settings 38 14 Details of the Extensive Form 41 15 Sequential Rationality and Subgame Perfection 43 16 Topics in Industrial Organization 45 17 Parlor Games 46 3 Instructor's Manual for Strategy: An Introduction to Game Theory Copyright 2002, 2008, 2010, 2013 by Joel Watson. For instructors only; do not distribute. CONTENTS 4 18 Bargaining Problems 48 19 Analysis of Simple Bargaining Games 50 20 Games with Joint Decisions; Negotiation Equilibrium 52 21 Unveri able Investment, hold up, Options, and Ownership 54 22 Repeated Games and Reputation 56 23 Collusion, Trade Agreements, and Goodwill 58 24 Random Events and Incomplete Information 60 25 Risk and Incentives in Contracting 63 26 Bayesian Nash Equilibrium and Rationalizability 65 27 Lemons, Auctions, and Information Aggregation 66 28 Perfect Bayesian Equilibrium 68 29 Job-Market Signaling and Reputation 70 30 Appendices 71 III Solutions to the Exercises 72 2 The Extensive Form 73 3 Strategies and the Normal Form 76 4 Beliefs, Mixed Strategies, and Expected Payo s 79 6 Dominance and best response 80 7 Rationalizability and Iterated Dominance 81 Instructor's Manual for Strategy: An Introduction to Game Theory Copyright 2002, 2008, 2010, 2013 by Joel Watson. For instructors only; do not distribute. CONTENTS 5 8 Location, Partnership, and Social Unrest 83 9 Nash Equilibrium 86 10 Oligopoly, Tari s, Crime, and Voting 89 11 Mixed-Strategy Nash Equilibrium 95 12 Strictly Competitive Games and Security Strategies 102 13 Contract, Law, and Enforcement in Static Settings 103 14 Details of the Extensive Form 108 15 Sequential Rationality and Subgame Perfection 110 16 Topics in Industrial Organization 114 17 Parlor Games 117 18 Bargaining Problems 119 19 Analysis of Simple Bargaining Games 121 20 Games with Joint Decisions; Negotiation Equilibrium 123 21 Unveri able Investment, Hold Up, Options, and Ownership 127 22 Repeated Games and Reputation 131 23 Collusion, Trade Agreements, and Goodwill 135 24 Random Events and Incomplete Information 138 25 Risk and Incentives in Contracting 140 26 Bayesian Nash Equilibrium and Rationalizability 142 Instructor's Manual for Strategy: An Introduction to Game Theory Copyright 2002, 2008, 2010, 2013 by Joel Watson. For instructors only; do not distribute. CONTENTS 6 27 Lemons, Auctions, and Information Aggregation 145 28 Perfect Bayesian Equilibrium 148 29 Job-Market Signaling and Reputation 151 30 Appendix B 155 IV Sample Questions 156 Instructor's Manual for Strategy: An Introduction to Game Theory Copyright 2002, 2008, 2010, 2013 by Joel Watson. For instructors only; do not distribute. 7 Part I General Materials This part contains some notes on outlining and preparing a game theory course for those adopting Strategy: An Introduction to Game Theory. Instructor's Manual for Strategy: An Introduction to Game Theory Copyright 2002, 2008, 2010, 2013 by Joel Watson. For instructors only; do not distribute. 8 Sample Syllabi Most of the book can be covered in a semester-length (13-15 week) course. Here is a sample thirteen-week course outline: Weeks Topics Chapters A. Representing Games 1 Introduction, extensive form, strategies, 1{3 and normal form 1{2 Beliefs and mixed strategies 4{5 B. Analysis of Static Settings 2{3 Best response, rationalizability, applications 6{8 3{4 Equilibrium, applications 9{10 5 Other equilibrium topics 11{12 5 Contract, law, and enforcement 13 C. Analysis of Dynamic Settings 6 Extensive form, backward induction, 14{15 and subgame perfection 7 Examples and applications 16{17 8 Bargaining 18{19 9 Negotiation equilibrium and problems of 20{21 contracting and investment 10 Repeated games, applications 22{23 D. Information 11 Random events and incomplete information 24 11 Risk and contracting 25 12 Bayesian equilibrium, applications 26{27 13 Perfect Bayesian equilibrium and applications 28{29 In a ten-week (quarter system) course, most, but not all, of the book can be covered. For this length of course, you can easily leave out (or simply not cover in class) some of the chapters. For example, any of the chapters devoted to applications (Chapters 8, 10, 16, 21, 23, 25, 27, and 29) can be covered selectively or skipped Instructor's Manual for Strategy: An Introduction to Game Theory Copyright 2002, 2008, 2010, 2013 by Joel Watson. For instructors only; do not distribute. 9 without disrupting the ow of ideas and concepts. Chapters 12 and 17 contain ma- terial that may be regarded as more esoteric than essential; one can easily have the students learn the material in these chapters on their own. Instructors who prefer not to cover contract can skip Chapters 13, 20, 21, and 25. Below is a sample ten-week course outline that is formed by trimming some of the applications from the thirteen-week outline. This is the outline that I use for my quarter-length game theory course. I usually cover only one application from each of Chapters 8, 10, 16, 23, 27, and 29. I avoid some end-of-chapter advanced topics, such as the in nite-horizon alternating-o er bargaining game, I skip Chapter 25, and, depending on the pace of the course, I selectively cover Chapters 18, 20, 27, 28, and 29. Weeks Topics Chapters A. Representing Games 1 Introduction, extensive form, strategies, 1-3 and normal form 1-2 Beliefs and mixed strategies 4-5 B. Analysis of Static Settings 2-3 Best response, rationalizability, applications 6-8 3-4 Equilibrium, applications 9-10 5 Other equilibrium topics 11-12 5 Contract, law, and enforcement 13 C. Analysis of Dynamic Settings 6 Backward induction, subgame perfection, 14-17 and an application 7 Bargaining 18-19 7-8 Negotiation equilibrium and problems of 20-21 contracting and investment 8-9 Repeated games, applications 22-23 D. Information 9 Random events and incomplete information 24 10 Bayesian equilibrium, application 26-27 10 Perfect Bayesian equilibrium and an application 28-29 Instructor's Manual for Strategy: An Introduction to Game Theory