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Step-by-Step: The Subgame-Perfect Equilibrium

In: Scissors and Rock

Author

Listed:
  • Manfred J. Holler

    (University of Hamburg)

  • Barbara Klose-Ullmann

    (Center of Conflict Resolution)

Abstract

In a sequential game, subgame perfectness selects equilibria such that players choose mutually best replies not only at the beginning of the game but also in every subgame. Consequentially, neither player has an incentive to deviate from the chosen equilibriumEquilibrium strategy in the course of the game. The sequence of moves of a strategy from the beginning until the final nodes is structured in a hierarchy of subgames. A true subgame starts with an information set containing one node only, i.e., there is perfect informationInformationperfect -. A market entry game is analyzed with a competitor deciding on whether to enter a monopoly market with the possibility that the monopolist will “fight,” e.g., lower the price such that both agents suffer from losses. Further, the equilibria of the Ultimatum GameUltimatum Game and the Stag Hunt GameStag Hunt Game are discussed—also with respect to social trustSocial trust. In this context, a model is presented to illustrate how reciprocityReciprocity works.

Suggested Citation

  • Manfred J. Holler & Barbara Klose-Ullmann, 2020. "Step-by-Step: The Subgame-Perfect Equilibrium," Springer Books, in: Scissors and Rock, chapter 0, pages 125-140, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-44823-3_8
    DOI: 10.1007/978-3-030-44823-3_8
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