Chapter 15: The Coase conjecture
In 1994, John F. Nash Jr, John C. Harsanyi and Reinhard Selten shared the Nobel Prize in Economics for their contributions to game theory. Together, these three researchers are identified with the three main ideas of game theory: Nash with equilibrium, Harsanyi with asymmetric information and Selten with subgame perfection. The first idea concerns the fundamental circularity of game-theoretic notions of equilibrium: in most strategic settings, the optimal action for one player depends on what she expects the other player to do. But the behavior of this other player depends on his expectation of the first player’s behavior. Thus, Nash’s contribution highlights the importance of expectations in the analysis of strategic behavior. The second idea, the one belonging to Harsanyi, asymmetric information, is the observation that behavior that seems deterministic or certain to one player because of her superior information, may seem random to her less informed opponent: for example, Firm 1 increases its output because its cost of production has decreased. But, Firm 2, without knowledge of the recent reduction in Firm 1’s cost of production, might view an increase in Firm 1’s output as uncertain and contingent on the unknown cost reduction.
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