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21 November 2005. Eric Rasmusen, Erasmuse@indiana.edu;
\section*{Preface}
\bigskip
\noindent
{\bf Contents and Purpose}
\noindent
This book is about noncooperative game theory and asymmetric information. In
the Introduction, I will say why I think these subjects are important, but here
in the Preface I will try to help you decide whether this is the appropriate
book to read if they do interest you.
I write as an applied theoretical economist, not as a game theorist, and
readers in anthropology, law, physics, accounting, and management science have
helped me to be aware of the provincialisms of economics and game theory. My
aim is to present the game theory and information economics that currently exist
in journal articles and oral tradition in a way that shows how to build simple
models using a standard format. Journal articles are more complicated and less
clear than seems necessary in retrospect; precisely because it is original, even
the discoverer rarely understands a truly novel idea. After a few dozen
successor articles have appeared, we all understand it and marvel at its
simplicity. But journal editors are unreceptive to new articles that admit to
containing exactly the same idea as old articles, just presented more clearly.
At best, the clarification is hidden in some new article's introduction or
condensed to a paragraph in a survey. Students, who find every idea as complex
as the originators of the ideas did when they were new, must learn either from
the confused original articles or the oral tradition of a top economics
department. This book tries to help.
\bigskip \noindent
{\bf Changes in the Second Edition, 1994}
By now, just a few years later after the First Edition, those trying to learn
game theory have more to help them than just this book, and I will list a
number of excellent books below. I have also thoroughly revised {\it Games
and Information}. George Stigler used to say that it was a great pity Alfred
Marshall spent so much time on the eight editions of {\it Principles of
Economics} that appeared between 1890 and 1920, given the opportunity cost
of the other books he might have written. I am no Marshall, so I have been
willing to sacrifice a Rasmusen article or two for this new edition, though I
doubt I will keep it up till 2019.
What I have done for the Second Edition is to add a number of new topics,
increase the number of exercises (and provide detailed answers), update
the references, change the terminology here and there, and rework the
entire book for clarity. A book, like a poem, is never finished, only
abandoned (which is itself a good example of a fundamental economic principle).
The one section I have dropped is the somewhat obtrusive discussion of existence
theorems; I recommend Fudenberg \& Tirole (1991a) on that subject. The new
topics include auditing games, nuisance suits, recoordination in equilibria,
renegotiation in contracts, supermodularity, signal jamming, market
microstructure, and government procurement. The discussion of moral hazard has
been reorganized. The total number of chapters has increased by two, the
topics of repeated games and entry having been given their own chapters.
\bigskip
\noindent
{\bf Changes in the Third Edition, 2001}
Besides numerous minor changes in wording, I have added new material and
reorganized some sections of the book.
The new topics are 10.3 ``Price Discrimination''; 12.6 ``Setting up a Way to
Bargain: The Myerson-Satterthwaite Mechanism''; 13.3 ``Risk and Uncertainty
over Values'' (for private- value auctions) ; A.7 ``Fixed-Point Theorems'';
and A.8 ``Genericity''.
To accommodate the additions, I have dropped 9.5 ``Other Equilibrium
Concepts: Wilson Equilibrium and Reactive Equilibrium'' (which is still
available on the book's website), and Appendix A, ``Answers to Odd-Numbered
Problems''. These answers are very important, but I have moved them to the
website because most readers who care to look at them will have web access and
problem answers are peculiarly in need of updating. Ideally, I would like to
discuss all likely wrong answers as well as the right answers, but I learn the
wrong answers only slowly, with the help of new generations of students.
Chapter 10, ``Mechanism Design in Adverse Selection and in Moral Hazard with
Hidden Information'', is new. It includes two sections from chapter 8 (8.1
``Pooling versus Separating Equilibrium and the Revelation Principle'' is now
section 10.1; 8.2 ``An Example of Moral Hazard with Hidden Knowledge: the
Salesman Game'' is now section 10.2) and one from chapter 9 (9.6 ``The
Groves Mechanism'' is now section 10.5).
Chapter 15 ``The New Industrial Organization'', has been eliminated and its
sections reallocated. Section 15.1 ``Why Established Firms Pay Less for Capital:
The Diamond Model'' is now section 6.6; Section 15.2 ``Takeovers and
Greenmail'' remains section 15.2; section 15.3 ``Market Microstructure and
the Kyle Model'' is now section 9.5; and section 15.4 ``Rate-of-return
Regulation and Government Procurement'' is now section 10.4.
Topics that have been extensively reorganized or rewritten include 14.2
``Prices as Strategies''; 14.3 ``Location Models''; the Mathematical
Appendix, and the Bibliography. Section 4.5 ``Discounting'' is now in the
Mathematical Appendix; 4.6 ``Evolutionary Equilibrium: The Hawk-Dove Game''
is now section 5.6; 7.5 ``State-space Diagrams: Insurance Games I and II''
is now section 8.5 and the sections in Chapter 8 are reordered; 14.2
``Signal Jamming: Limit Pricing'' is now section 11.6. I have recast 1.1
``Definitions'', taking out the OPEC Game and using an entry deterrence game
instead, to illustrate the difference between game theory and decision theory.
Every other chapter has also been revised in minor ways.
Some readers preferred the First Edition to the Second because they thought
the extra topics in the Second Edition made it more difficult to cover. To
help with this problem, I have now starred the sections that I think are
skippable. For reference, I continue to have those sections close to where
the subjects are introduced.
The two most novel features of the book are not contained within its covers.
One is the website, at
Http://rasmusen.org/GI/index.html
The website includes answers to the odd-numbered problems, new questions and
answers, errata, files from my own teaching suitable for making overheads, and
anything else I think might be useful to readers of this book.
The second new feature is a reader-- a prettified version of the course
packet I use when I teach this material. This is available from Blackwell
Publishers, and contains scholarly articles, news clippings, and cartoons
arranged to correspond with the chapters of the book. I have tried especially
to include material that is somewhat obscure or hard to locate, rather than
just a collection of classic articles from leading journals.
If there is a fourth edition, three things I might add are (1) a long
discussion of strategic complements and substitutes in Chapter 14, or perhaps
even as a separate chapter; (2) Holmstrom \& Milgrom's 1987 article on
linear contracts; and (3) Holmstrom \& Milgrom's 1991 article on multi-task
agency. Readers who agree, let me know and perhaps I'll post notes on these
topics on the website.
\bigskip
\noindent
{\bf Changes in the Fourth Edition, 2001}
{\it Games and Information} continues to do well despite the continued flow of
books on game theory and industrial organization, and the arrival of a number of
specialized books on topics such as contracting and auctions.
I've had emails from readers in Canada, Chile, China, Dubai, Germany, Great
Britain, India, Iran, Italy, Jamaica, Korea, Malaysia, Man, Mexico,
Norway, Paraguay, Portugal, Spain, Taiwan, and the United States. This
encourages me to think a
new edition would be worthwhile, incorporating, especially, new models and ways
to organize thoughts for the the material on asymmetric information in the
second half of the book. I have also added more homework problems, and
fourteen classroom games, one at the end of each chapter.
Besides the specific changes mentioned below, I have made minor changes
throughout the book. I have, for example, renamed the strategies in the
Prisoner's Dilemma from $Deny$ and $Confess$ to $Silence$ and $Blame$. The new
terms are less conventional, but they do avoid avoid the confusion in the
abbreviations $C$ and $D$ with $Cooperate$ and $Defect$, two other commonly used
terms I dislike because they invite confusion with cooperative games and
deviations in strategies. This is an illustration of how I have tried to think
of writing up the material in this book.
The chapters that have been most changed are
Chapters 10 (Mechanisms), 13 (Auctions), and 14 (Pricing), but there is
also new material in other chapters.
Chapter 3 (Mixed Strategies) now has material on Bertrand equilibrium and
strategic substitutes and complements formerly in Chapter 14 and material on
patent races formerly in Chapter 15. It has a new section on existence of
equilibrium, and an example of how a pure strategy can be strictly dominated by
a mixed strategy.
Chapter 7 (Moral Hazard I) has a discussion of quasilinear utility functions
and the effect of changes in bargaining power.
Chapter 8 (Moral Hazard II) has a new section on Holmstrom \& Milgrom's
1991 idea of multitask agency, in which the agent uses more than one kind of
effort and generates multiple outputs, only one of which can be well measured.
Chapter 9 (Adverse Selection) has a new version of the Production Game to
illustrate the combination of moral hazard with adverse selection.
Chapter 10 (Mechanisms) also has a new version of the Production Game, used
to illustrate mechanism design and the new topic of the Maskin matching scheme.
I have added a section on the Sender-Receiver game of Crawford and Sobel.
I've cut back on the treatment of Myerson's Trading Game, giving just one
version instead of three. In general, I have tried to make the notation and
analysis of this chapter more uniform, putting special emphasis on the standard
outcome that the bad type's participation constraint and the good type's
incentive compatibility constraints are binding. I have moved away from the
term ``moral hazard with hidden knowledge'' in favor of the more direct ``post-
contractual hidden knowledge''.
Chapter 11 (Signalling) contains the new topic of countersignalling (introduced
in Feltovich,
Harbaugh \& To [2002]), under which middle-quality types signal, but the
best types deliberately do not, instead relying on other means of conveying
their type. I have also replaced the 3rd editions's model of limit pricing as
signal jamming with a new, simpler model.
Chapter 13 (Auctions) is the most drastically changed, by far. In earlier
editions the treatment of auctions was relatively nontechnical because I wished
to avoid the difficult task of trying to convey that intricate but unified
literature in the simplified but formal style of the rest of the book. By
now, however, enough new treatments of the old material has appeared for the
unities in auction theory to be presented more simply, and so I've made the
chapter much longer, and technical. This allows me to add topics such as all-
pay auctions, proof of the Revenue Equivalence Theorem, the marginal-revenue
interpetation of reserve prices, a formal model comparing different auction
rules in a common-value auction, Klemperer's Wallet Game, affiliation, and
linkage.
Chapter 14 (Pricing) has a section on vertical quality differentiation, by a
monopolist and by a duopoly, which also allows discussion of ``crimping the
product''.
I have dropped Chapter 15 (Entry), though it remains available at the website.
Its topics had no technical unity, and while they served well as examples of
techniques from earlier chapters, I decided that they contained enough examples,
especially as new editions have been increasing the number of models in those
earlier chapters.
\noindent
The book's website is at
http://rasmusen.org/GI
\noindent
The answers to the odd-numbered homework problems, and teaching notes for the
classroom games are at
http://rasmusen.org/GI/funstuff.htm
The classroom games are an innovation with this edition. I have found it
helpful in MBA and undergraduate classes to have students take the parts of
players in games. The greatest benefit is to force them to think about
possible strategies and to realize that models are imperfect descriptions
of the real world even in the controlled situation of a classroom--- but that
they do provide a starting point for thinking about the real world. Most of the
games are less useful at teaching actual results because of the many outcomes
that can happen, but they are useful as something like case studies, particular
histories on which students and teacher can comment. Whether the games are
useful for PhD students is less clear, but they, too, need to understand the
link between models and reality, something hard to convey in lectures.
I am very interested in hearing feedback on how the classroom games work
in particular situations. I have included detailed instructions on practical
matters (e.g., what overheads to bring to class, what instructions the players
are likely to get wrong), but I am sure I will hear of improvements in both
implementation and explanation. I have included one game for each chapter, but
some topics lend themselves to games more than others--- mixed strategies,
public good dilemmas, and backwards induction, in particular, with contracting
being the least suited to games.
\noindent
{\it Readings in Games and Information} continues to be available in hardback
and paperback from Blackwell Publishing. Its website is at
\noindent
http://rasmusen.org/GI/reader/rcontents.htm
\bigskip
\noindent
{\bf Using the Book}
\noindent
The book is divided into three parts: Part I on game theory; Part II on
information economics; and Part III on applications to particular subjects.
Parts I and II, but not Part III, are ordered sets of chapters.
Part I by itself would be appropriate for a course on game theory, and
sections from Part III could be added for illustration. If students are already
familiar with basic game theory, Part II can be used for a course on information
economics. The entire book would be useful as a secondary text for a course
on industrial organization. I teach material from every chapter in a semester-
long course for first- and second-year doctoral students at Indiana University's
Kelley School of Business, including more or fewer chapter sections depending
on the progress of the class.
Exercises and notes follow the chapters. It is useful to supplement a book
like this with original articles, but I leave it to my readers or their
instructors to follow up on the topics that interest them rather than
recommending particular readings. I also recommend that readers try
attending a seminar presentation of current research on some topic from the
book; while most of the seminar may be incomprehensible, there is a real thrill
in hearing someone attack the speaker with ``Are you sure that equilibrium is
perfect?'' after just learning the previous week what ``perfect'' means.
Some of the exercises at the end of each chapter put slight twists on
concepts in the text while others introduce new concepts. Answers to odd-
numbered questions are given at the website. I particularly recommend working
through the problems for those trying to learn this material without an
instructor.
The endnotes to each chapter include substantive material as well as
recommendations for further reading. Unlike the notes in many books, they are
not meant to be skipped, since many of them are important but tangential, and
some qualify statements in the main text. Less important notes supply
additional examples or list technical results for reference. A mathematical
appendix at the end of the book supplies technical references, defines certain
mathematical terms, and lists some items for reference even though they are not
used in the main text.
\bigskip
\noindent
{\bf The Level of Mathematics}
In surveying the prefaces of previous books on game theory, I see that advising
readers how much mathematical background they need exposes an author to charges
of being out of touch with reality. The mathematical level here is about the
same as in Luce \& Raiffa (1957), and I can do no better than to quote the
advice on page 8 of their book:
\begin{quotation} \noindent
Probably the most important prerequisite is that ill-defined quality:
mathematical sophistication. We hope that this is an ingredient not required in
large measure, but that it is needed to some degree there can be no doubt. The
reader must be able to accept conditional statements, even though he feels the
suppositions to be false; he must be willing to make concessions to mathematical
simplicity; he must be patient enough to follow along with the peculiar kind of
construction that mathematics is; and, above all, he must have sympathy with the
method --- a sympathy based upon his knowledge of its past sucesses in various
of the empirical sciences and upon his realization of the necessity for rigorous
deduction in science as we know it. \end{quotation}
If you do not know the terms ``risk averse,'' ``first order condition,''
``utility function,'' ``probability density,'' and ``discount rate,'' you will
not fully understand this book. Flipping through it, however, you will see that
the equation density is much lower than in first-year graduate microeconomics
texts. In a sense, game theory is less abstract than price theory, because it
deals with individual agents rather than aggregate markets and it is oriented
towards explaining stylized facts rather than supplying econometric
specifications. Mathematics is nonetheless essential. Professor Wei puts this
well in his informal and unpublished class notes:
\begin{quotation}
My experience in learning and teaching convinces me that going through a proof
(which does not require much mathematics) is {\it the most effective way in
learning, developing intuition, sharpening technical writing ability, and
improving creativity.} However it is an extremely painful experience for people
with simple mind and narrow interests.
Remember that a good proof should be {\it smooth} in the sense that any serious
reader can read through it like the way we read {\it Miami Herald}; should be
{\it precise} such that no one can add/delete/change a word---like the way we
enjoy Robert Frost's poetry! \end{quotation}
I wouldn't change a word of that.
\bigskip
\noindent {\bf Other Books}
At the time of the first edition of this book, most of the topics covered
were absent from existing books on either game theory or information economics.
Noteworthy older books on game theory include Luce \& Raiffa (1957), Moulin
(1986), Ordeshook (1986), Rapoport (1960, 1970), and Shubik (1982). Books on
information in economics were mainly concerned with decision making under
uncertainty rather than asymmetric information. Since the First Edition, a spate
of books on game theory has appeared. The stream of new books has become a
flood, and one of the pleasing features of this literature is its variety. Each
one is different, and both student and teacher can profit by owning an
assortment of them, something one cannot say of many other subject areas. We
have not converged, perhaps because teachers are still converting into books
their own independent materials from courses not taught with texts. I only
wish I could say I had been able to use all my competitors' good ideas in
the present edition.
Why, you might ask in the spirit of game theory, do I conveniently list all my
competitor's books here, giving free publicity to books that could substitute
for mine? For an answer, you must buy this book and read Chapter 11 on
signalling. Then you will understand that only an author quite confident that
his book compares well with possible substitutes would do such a thing, and you
will be even more certain that your decision to buy the book was a good one.
\begin{center} {\bf Some Books on Game Theory and Its Applications}
\end{center} \begin{small} \begin{enumerate}
\item[{\bf 1988} ] \begin{enumerate} \item[] {\bf Tirole,} Jean, {\it The
Theory of Industrial Organization}. MIT Press. 479 pages. Still the standard
text for advanced industrial organization.
\end{enumerate}
\item[{\bf 1989} ] \begin{enumerate} \item[] {\bf Eatwell}, John, Murray
Milgate \& Peter Newman, eds., {\it The New Palgrave: Game Theory}. Norton.
264 pages. A collection of brief articles on topics in game theory by
prominent scholars.
\item[] {\bf Rasmusen,} Eric, {\it Games and Information}, 1st edition.
Blackwell Publishing. 352 pages.
\item[] {\bf Schmalensee,} Richard \& Robert Willig, eds., {\it The Handbook
of Industrial Organization}, in two volumes. North-Holland. A collection of
not-so-brief articles on topics in industrial organization by prominent
scholars.
\item[] {\bf Spulber,} Daniel {\it Regulation and Markets}. MIT Press. 690
pages. Applications of game theory to rate of return regulation.
\end{enumerate}
\item[{\bf 1990} ] \begin{enumerate} \item[] {\bf Banks,} Jeffrey, {\it
Signalling Games in Political Science}. Harwood Publishers. 90 pages. Out of
date by now, but worth reading anyway.
\item[]{\bf Friedman, } James, {\it Game Theory with Applications to
Economics}, 2nd edition. Oxford University Press (First edition, 1986). 322
pages. By a leading expert on repeated games.
\item[] {\bf Kreps,} David, {\it A Course in Microeconomic Theory}.
Princeton University Press. 850 pages. A competitor to Varian's Ph.D. micro
text, in a more conversational style, albeit a conversation with a brilliant
economist at a level of detail that scares some students.
\item[] {\bf Kreps,} David, {\it Game Theory and Economic Modeling}.
Oxford University Press. 195 pages. A discussion of Nash equilibrium and its
problems.
\item[] {\bf Krouse,} Clement, {\it Theory of Industrial Economics}.
Blackwell Publishers. 602 pages. A good book on the same topics as Tirole's
1989 book, largely overshadowed by it.
\end{enumerate}
\item[{\bf 1991} ] \begin{enumerate} \item[] {\bf Dixit,} Avinash K. \&
Barry J. Nalebuff, {\it Thinking Strategically: The Competitive Edge in
Business, Politics, and Everyday Life}. Norton. 393 pages. A book in the
tradition of popular science, full of fun examples but with serious ideas too.
I use this for my MBA students' half-semester course, though newer books are
offering competition for that niche.
\item[] {\bf Fudenberg,} Drew \& Jean Tirole, {\it Game Theory}. MIT
Press. 579 pages. This has become the standard text for second-year PhD courses
in game theory. (Though I hope the students are referring back to {\it Games
and Information} for help in getting through the hard parts.)
\item[] {\bf Milgrom,} Paul and John Roberts, {\it Economics of
Organization and Management}. Prentice-Hall. 621 pages. A model for how to
think about organization and management. The authors taught an MBA course from
this, but I wonder whether that is feasible anywhere but Stanford Business
School.
\item[] {\bf Myerson,} Roger, {\it Game Theory: Analysis of Conflict}.
Harvard University Press. 568 pages. At an advanced level. In revising for
the third edition, I noticed how well Myerson's articles are standing the test
of time. There's even more Myerson in the fourth edition.
\end{enumerate}
\item[{\bf 1992} ]
\begin{enumerate}
\item[] {\bf Aumann,} Robert \& Sergiu Hart, eds., {\it Handbook of
Game Theory with Economic Applications}, Volume 1. North- Holland. 733 pages.
A collection of articles by prominent scholars on topics in game theory.
\item[] {\bf Binmore,} Ken, {\it Fun and Games: A Text on Game Theory}.
D.C. Heath. 642 pages. No pain, no gain; but pain and pleasure can be mixed
even in the study of mathematics.
\item[] {\bf Gibbons,} Robert, {\it Game Theory for Applied Economists}.
Princeton University Press. 267 pages. Perhaps the main competitor to {\it
Games and Information}. Shorter and less idiosyncratic.
\item[] {\bf Hirshleifer,} Jack \& John Riley, {\it The Economics of
Uncertainty and Information}. Cambridge University Press. 465 pages. An
underappreciated book that emphasizes information rather than game theory.
\item[] {\bf McMillan,} John, {\it Games, Strategies, and Managers: How
Managers Can Use Game Theory to Make Better Business Decisions}. Oxford
University Press. 252 pages. Largely verbal, very well written, and an example
of how clear thinking and clear writing go together.
\item[] {\bf Varian,} Hal, {\it Microeconomic Analysis,} Third edition.
Norton. (1st edition, 1978; 2nd edition, 1984.) 547 pages. Varian was the
standard PhD micro text when I took the course in 1980. The third edition is
much bigger, with lots of game theory and information economics concisely
presented. \end{enumerate}
\item[{\bf 1993} ] \begin{enumerate}
\item[] {\bf Basu,} Kaushik, {\it Lectures in Industrial Organization Theory.}
Blackwell Publishers. 236 pages. Lots of game theory as well as I.O.
\item[] {\bf Laffont,} Jean-Jacques \& Jean Tirole, {\it A Theory of
Incentives in Procurement and Regulation}. MIT Press. 705 pages. If you like
section 10.4 of {\it Games and Information}, here is an entire book on the
model.
\item[] {\bf Martin,} Stephen, {\it Advanced Industrial Economics}. Blackwell
Publishers. 660 pages. Detailed and original analysis of particular models,
and much more attention to empirical articles than Krouse, Shy, and Tirole.
\end{enumerate}
\item[{\bf 1994} ] \begin{enumerate}
\item[] {\bf Aumann,} Robert \& Sergiu Hart, eds., {\it Handbook of Game
Theory with Economic Applications}, Volume 2. North-Holland. A collection
of articles by prominent scholars on topics in game theory.
\item[] {\bf Baird,} Douglas, Robert Gertner \& Randal Picker, {\it
Strategic Behavior and the Law: The Role of Game Theory and Information
Economics in Legal Analysis}. Harvard University Press. 330 pages. A mostly
verbal but not easy exposition of game theory using topics such as
contracts, procedure, and tort.
\item[] {\bf Gardner,} Roy, {\it Games for Business and Economics}. John
Wiley and Sons. 480 pages. Indiana University has produced not one but two
game theory texts.
\item[] {\bf Morris,} Peter, {\it Introduction to Game Theory}. Springer
Verlag. 230 pages. Not in my library yet.
\item[] {\bf Morrow, } James, {\it Game Theory for Political
Scientists}. Princeton University Press. 376 pages. The usual topics, but
with a political science slant, and especially good on things such as utility
theory.
\item[] {\bf Osborne,} Martin and Ariel Rubinstein, {\it A Course in Game
Theory}. MIT Press. 352 pages. Similar in style to Eichberger's 1993 book. See
their excellent ``List of Results'' on pages 313-19 which summarizes the
mathematical propositions without using specialized notation.
\item[] {\bf Rasmusen, } Eric, {\it Games and Information}, 2nd edition.
Blackwell Publishing.
\end{enumerate}
\item[{\bf 1995} ] \begin{enumerate} \item[] {\bf Mas-Colell,} Andreu
Michael D. Whinston and Jerry R. Green, {\it Microeconomic Theory}.
Oxford University Press. 981 pages. This combines the topics of Varian's PhD
micro text, those of {\it Games and Information}, and general equilibrium.
Massive, and a good reference.
\item[] {\bf Owen,} Guillermo, {\it Game Theory}. Academic Press, 3rd
edition. (1st edition, 1968; 2nd edition, 1982.) This book clearly lays out the
older approach to game theory, and holds the record for longevity in game
theory books.
\end{enumerate}
\item[{\bf 1996} ] \begin{enumerate}
\item[] {\bf Besanko,} David, David Dranove and Mark Shanley, {\it Economics
of Strategy}. John Wiley and Sons. This actually can be used with Indiana
M.B.A. students, and clearly explains some very tricky ideas such as strategic
complements.
\item[] {\bf Shy,} Oz, {\it Industrial Organization, Theory and
Applications}. MIT Press. 466 pages. A new, somewhat easier competitor to
Tirole's 1988 book.
\end{enumerate}
\item[{\bf 1997} ] \begin{enumerate} \item[]
{\bf Gates,} Scott and Brian Humes, {\it Games, Information, and Politics:
Applying Game Theoretic Models to Political Science}. University of Michigan
Press. 182 pages.
\item[] {\bf Ghemawat,} Pankaj, {\it Games Businesses Play: Cases and
Models}. MIT Press. 255 pages. Analysis of six cases from business using game
theory at the MBA level. Good for the difficult task of combining theory with
evidence.
\item[] {\bf Macho-Stadler,} Ines and J. David Perez-Castillo, {\it An
Introduction to the Economics of Information: Incentives and Contracts}. Oxford
University Press. 277 pages. Entirely on moral hazard, adverse selection, and
signalling.
\item[] {\bf Romp,} Graham, {\it Game Theory: Introduction and
Applications}. Oxford University Press. 284 pages. With unusual applications
(chapters on macroeconomics, trade policy, and environmental economics) and
lots of exercises with answers.
\item[] {\bf Salanie,} Bernard, {\it The Economics of Contracts: A Primer}.
MIT Press. 232 pages. Specialized to a subject of growing importance.
\end{enumerate}
\item[{\bf 1998}] \begin{enumerate}
\item[] {\bf Bierman,} H. Scott \& Luis Fernandez, {\it Game Theory
with Economic Applications}. Addison Wesley, Second edition. (1st edition,
1993.) 452 pages. A text for undergraduate courses, full of good examples.
\item[] {\bf Dugatkin,} Lee and Hudson Reeve, editors, {\it Game
Theory \& Animal Behavior.} Oxford University Press. 320 pages.
Just on biology applications.
\end{enumerate}
\item[{\bf 1999}]
\begin{enumerate} \item[] {\bf Aliprantis,} Charalambos \& Subir Chakrabarti
{\it Games and Decisionmaking}. Oxford University Press. 224 pages. An
undergraduate text for game theory, decision theory, auctions, and bargaining,
the third game theory text to come out of Indiana.
\item[] {\bf Basar}, Tamar \& Geert Olsder {\it Dynamic Noncooperative Game
Theory}, 2nd edition, revised. Society for Industrial and Applied Mathematics
(1st edition 1982, 2nd edition 1995). This book is by and for mathematicians,
with surprisingly little overlap between its bibliography and that of the
present book. Suitable for people who like differential equations and linear
algebra.
\item[] {\bf Dixit,} Avinash \& Susan Skeath, {\it Games of Strategy}.
Norton. 600 pages. Nicely laid out with color and boldfacing. Game theory plus
chapters on bargaining, auctions, voting, etc. Detailed verbal explanations of
many games.
\item[] {\bf Dutta,} Prajit, {\it Strategies and Games: Theory And
Practice}. MIT Press. 450 pages.
\item[]{\bf Muthoo, } Abhinay, {\it Bargaining Theory with Applications}.
Cambridge University Press, 357 pages. As the title says: a place to go to
look up bargaining models.
\item[] {\bf Stahl,} Saul, {\it A Gentle Introduction to Game
Theory}. American Mathematical Society. 176 pages. In the mathematics
department tradition, with many exercises and numerical answers.
\item[]
{\bf Wolfstetter}, Elmar, {\it Topics in Microeconomics: Industrial
Organization, Auctions, and Incentives}, Cambridge: Cambridge University Press.
370 pages. I like the chapter on auctions and stochastic dominance, in
particular.
\end{enumerate}
As I updated this to the 21st century for the Fourth Edition, I realized that
I would have to be more selective. I've listed more books below, but have made
less effort to be comprehensive. Mike Shor's website at
http://www.gametheory.net/cgi-bin/viewbooks.pl is a good place to look for
additional books.
\item[{\bf 2000}] \begin{enumerate}
\item[] {\bf Gintis,} Herbert, {\it Game Theory Evolving}. Princeton
University Press. 531 pages. A wonderful book of problems and solutions,
with much explanation and special attention to evolutionary biology.
\item[]
{\bf Vives}, Xavier, {\it Oligopoly Pricing: Old Ideas and New Tools}., MIT
Press. 441 pages. The standard for that topic.
\end{enumerate}
\item[{\bf 2001}] \begin{enumerate}
\item[]
{\bf Laffont}, Jean-Jacques \& David Martimort, {\it The Theory of Incentives:
The Principal-Agent Model}. Princeton University Press. 421 pages. Special for
its comments on historical development and for the perceptive intuitions mixed
in among the equations.
\item[] {\bf Rasmusen,} Eric {\it Games and Information}. Blackwell
Publishers, Third edition. 445 pages.
\item[] {\bf Rasmusen,} Eric, editor, {\it Readings in Games and
Information}. Blackwell Publishers. 427 pages. Journal and newspaper articles
on game theory and information economics. A cartoon for each topic, too!
\end{enumerate}
\item[{\bf 2002}] \begin{enumerate}
\item[] {\bf Aumann,} Robert \& Sergiu Hart, eds., {\it Handbook of Game
Theory with Economic Applications}, Volume 3. North-Holland. 733 pages. A
collection of articles by prominent scholars on topics in game theory.
\item[]
{\bf Krishna}, Vijay, {\it Auction Theory}. Academic Press. 297 pages. The
standard text for auction theory.
\item[]
{\bf McAfee}, R. Preston, {\it Competitive Solutions: The Strategist's
Toolkit}. Princeton University Press. 404 pages. An excellent "strategy for
managers" book that lays out ideas from game theory and information economics
using words and business examples. It's as worth reading cover to cover for a
professor as for an MBA student.
\item[]
{\bf Watson}, Joel {\it
Strategy: An Introduction to Game Theory.} W. W. Norton \& Co. 334 pages. A book
by a well-known contract theoriest that is similar in topics and level to {\it
Games and Information}.
\end{enumerate}
\item[{\bf 2003}] \begin{enumerate}
\item[]
{\bf Milgrom}, Paul, {\it Putting Auction Theory to Work}. Cambridge
University Press. 368 pages. Careful about the mathematical foundations, and
covers many special cases (multiple objects, type correlations).
\item[]
{\bf Osborne}, Martin, {\it An Introduction to Game Theory}. Oxford University
Press. 504 pages. His second game theory book, this one is for undergraduates,
precise but with little calculus.
\end{enumerate}
\item[{\bf 2004}] \begin{enumerate}
\item[]
{\bf Klemperer}, Paul, {\it Auctions: Theory and Practice}. Princeton
University Press. 246 pages. Mostly verbal, but especially good in the
mathematics it does include.
\end{enumerate}
\item[{\bf 2005}] \begin{enumerate}
\item[]
{\bf Bolton}, Patrick and Mathias Dewatripont, {\it
Contract Theory}. MIT Press. 688 pages. A detailed exposition of principal-
agent models.
\end{enumerate}
\item[{\bf 2006}] \begin{enumerate}
\item[] {\bf Rasmusen,} Eric {\it Games and Information}. Blackwell
Publishers, Fourth edition. (1st edition, 1989; 2nd edition, 1994; 3rd
edition 2001.) Read on.
\end{enumerate}
\end{enumerate}
\end{small}
\bigskip
\noindent
{\bf Contact Information}
\noindent
The website for the book is at
http://www.rasmusen.org/GI
The site has the answers to the odd-numbered problems at the end of the
chapters, and has instructors' notes for the classroom games. For answers to
even-numbered questions, instructors or others needing them for good reasons
should email me at Erasmuse@Indiana.edu; send me snailmail at Eric
Rasmusen, Department of Business Economics and Public Policy, Kelley School of
Business, Indiana University, 1309 East 10th Street, Bloomington, Indiana
47405-1701; or fax me at (812)855-3354.
If you wish to contact the publisher of this book, the addresses are 108 Cowley
Road, Oxford, England, OX4 1JF; or Blackwell Publishers, 350 Main Street,
Malden, Massachusetts, 02148.
The text files on the website are two forms (a) *.tex, LaTeX, which uses
only ASCII characters, but does not have the diagrams, and (b) *.pdf, Adobe
Acrobat, which is formatted and can be read using a free reader program.
I encourage readers to submit additional homework problems as well as errors
and frustrations. They can be sent to me by e-mail at Erasmuse@Indiana.edu.
\bigskip
\noindent
{\bf Acknowledgements}
\noindent
I would like to thank the many people who commented on clarity, suggested topics
and references, or found mistakes. I've put affiliations next to their names,
but remember that these change over time (A.B. was not a finance professor when
he was my research assistant!).
\noindent
First Edition: Dean Amel (Board of Governors, Federal Reserve), Dan Asquith
(S.E.C.), Sushil Bikhchandani (UCLA business economics), Patricia Hughes Brennan
(UCLA accounting), Paul Cheng, Luis Fernandez (Oberlin economics), David
Hirshleifer (Ohio State finance), Jack Hirshleifer (UCLA economics), Steven
Lippman (UCLA management science), Ivan Png (Singapore), Benjamin Rasmusen
(Roseland Farm), Marilyn Rasmusen (Roseland Farm), Ray Renken (Central Florida
physics), Richard Silver, Yoon Suh (UCLA accounting), Brett Trueman (Berkeley
accounting), Barry Weingast (Hoover) and students in Management 200a made useful
comments. D. Koh, Jeanne Lamotte, In-Ho Lee, Loi Lu, Patricia Martin, Timothy
Opler (Ohio State finance), Sang Tran, Jeff Vincent, Tao Yang, Roy Zerner, and
especially Emmanuel Petrakis (Crete economics) helped me with research
assistance at one stage or another. Robert Boyd (UCLA anthropology), Mark
Ramseyer (Harvard law), Ken Taymor, and John Wiley (UCLA law) made extensive
comments in a reading group as each chapter was written.
\noindent
Second Edition: Jonathan Berk (U. British Columbia commerce), Mark Burkey
(Appalachian State economics), Craig Holden (Indiana finance), Peter Huang
(Penn Law), Michael Katz (Berkeley business), Thomas Lyon (Indiana business
economics), Steve Postrel (Northwestern business), Herman Quirmbach (Iowa State
economics), H. Shifrin, George Tsebelis (UCLA poli sci), Thomas Voss (Leipzig
sociology), and Jong-Shin Wei made useful comments, and Alexander Butler
(Louisiana State finance) and An-Sing Chen provided research assistance. My
students in Management 200 at UCLA and G601 at Indiana University provided
invaluable help, especially in suffering through the first drafts of the
homework problems.
\noindent
Third Edition: Kyung-Hwan Baik (Sung Kyun Kwan), Patrick Chen, Robert Dimand
(Brock economics), Mathias Erlei (Muenster), Francisco Galera, Peter-John Gordon
(University of the West Indies), Erik Johannessen, Michael Mesterton-Gibbons
(Pennsylvania), David Rosenbaum (Nebraska economics), Richard Tucker, Hal
Wasserman (Berkeley), and Chad Zutter (Indiana finance) made comments that
were helpful for the Third Edition. Blackwell supplied anonymous reviewers of
superlative quality. Scott Fluhr, Pankaj Jain and John Spence provided research
assistance and new generations of students in G601 were invaluable in helping
to clarify my writing.
\noindent
Fourth Edition: Abdullahi Abdulkadri (U. of the West Indies), Michael Alvarez
(Bergen), Michael Baye (Indiana), David Collie (Cardiff), Bouwe Dijkstra
(Nottingham), Ralf Elsas
(Goethe), Sean Gailmard (Chicago), Diego Garcia (Dartmouth), Richmond Harbaugh
(Indiana), Paul Klemperer (Oxford), Bettina Kromen
(Cologne), Eva Labro (LSE), Andrew Lilico (Europe Economics), Robert Losee
(UNC-CH), Ron Mallon (Utah), Frank P. Maier-Rigaud (Friedrich Wilhelms U.),
Alexandra Minicozzi (Texas), Luis Pacheco (Portucalense), Tommy Pousset
(Louvain), Michael Rauh (Indiana), Michael Rothkopf (Rutgers), Pedro Sousa
(Portucalense), Charles Tharp, Randal Verbrugge
(BLS),Victor Yip (Hong Kong), and Lily Yu (Cornell), and especially Maria
Arbatskaya (Emory), Kyung Baik (Sungkyunkwan), Martin Caley (Isle of Man
Treasury) and Michael Rauh (Indiana). Lan Chang, Ariel Kemper, Manu Raghav,
Michael
Swetz, and Benjamin Warolin provided research assistance. As always, my
students were an important
part of writing this book.
\begin{flushleft}
Eric Rasmusen\\
Dan R. and Catherine M. Dalton Professor\\
Department of Business Economics and Public Policy \\
Kelley School of Business, Indiana University \\
Bloomington, Indiana
\end{flushleft}
\end{document}