with Economic Applications

Editors: Robert J. Aumann and Sergiu Hart

Publisher: Elsevier Science Publishers (North-Holland)

Volume 1 Volume 2 Volume 3


Robert J. Aumann and Sergiu Hart

This is the third and last volume of the HANDBOOK OF GAME THEORY with Economic Applications. For an introduction to the entire Handbook, please see the Preface to the first volume. Here we provide an overview of the organization of this third volume. As before, the space devoted in the Preface to the various chapters is no indication of their relative importance.

We follow the rough division into "noncooperative," "cooperative," and "general" adopted in the previous volumes. Chapters 41 through 52 are mainly noncooperative; 53 through 58, cooperative; 59 through 62, general. This division should not be taken too seriously; chapters may well contain aspects of both approaches. Indeed, we hope that the Handbook will help demonstrate that noncooperative and cooperative game theory are two sides of the same coin, which complement each other well.

The noncooperative part of the volume starts with three chapters on the basic concepts of the noncooperative approach. Chapter 41 discusses strategic equilibrium -- "Nash," its refinements, and its extensions -- without doubt the most used solution of game theory. The conceptual foundations and significance of these notions are by no means straightforward; Chapter 42 delves into these matters from various perspectives. The following chapter, 43, deals with incomplete information in multi-person interactive contexts, with special reference to "Bayesian" games.

Chapters 44 through 48 survey three important classes of games. The case of two players is of particular significance: A two-person interaction is the simplest and most basic there is; there are no non-trivial group structures. The theoretical and computational implications of this in the general (non-zero-sum) case are studied in Chapters 44 and 45 (two-person zero-sum games are covered in Chapter 20 in Volume 2). The other extreme -- when there are many individually insignificant players (a continuum or "ocean" -- is the subject of Chapter 46. The next two chapters are devoted to stochastic games: multi-stage games in which current actions physically affect future opportunities (unlike repeated games, surveyed in Volume 1, which reflect mainly the informational side of ongoing interactions). Chapter 47 covers the period up to 1995; Chapter 48, the period since then.

Considerable attention is paid in this Handbook to applications, economic and otherwise; in this volume, chapters 49 through 52 and 57 through 61. Among the "hottest" applications is Industrial Organization, studied in Chapter 49, which discusses matters like collusion, entry and entry deterrence, predation, price wars, subsidies, strategic international trade, and "clearance" sales. The next chapter, 50, continues the discussion of noncooperative models of bargaining (Chapter 7 in Volume 1), with special reference to the implications of incomplete information about the other player (his reservation prices, red lines, true preferences, and so on). Here, the participants must credibly convey their position; a special section is devoted to empirical data from strikes. Inspection games -- which may be viewed as statistical inference when data can be strategically manipulated -- are covered in Chapter 51. This area became popular in the mid-sixties, at the height of the "cold war," when arms control and disarmament treaties were being negotiated; more recently, these techniques have been applied to auditing, environmental control, material accountancy, and so on. The last "noncooperative" chapter, 52, shows how the area of economic history benefits from the discipline of game theory.

The cooperative part of this volume centers on the Shapley value, its extensions and applications. Perhaps the most "successful" cooperative solution concept, the value is universally applicable (unlike the core), and leads to significant insights in widely varying contexts. The basic definitions and results are presented in Chapter 53. Relaxing and generalizing the axioms defining the value leads to the extensions discussed in Chapter 54. The previous two chapters study the basic model with transferable utility; in many contexts (especially economic ones) non-transferable utilities, covered in Chapter 55, are more realistic. Chapter 56 treats values of games with many individually insignificant players (a continuum or "ocean" Inter alia, this case is basic to understanding perfectly competitive economies, whose value theory is reviewed in Chapter 57. Other applications of the value in continuum games -- taxation, public goods and fixed prices -- are dealt with in Chapter 58.

The Handbook closes with four "mixed" chapters, each combining cooperative and noncooperative tools and approaches in four very different areas of application. Chapter 59 treats political systems from the "micro," strategic viewpoint (sophisticated voting equilibria, manipulation of agendas and voting rules, and so on). This is to be distinguished from the more "macro"oriented power considerations discussed in Chapter 32 in Volume 2. Chapter 60 treats a relatively new area of game-theoretic application: Law. It has to do both with the "game" implicit in a given legal system, and with the design of "optimal" legal systems. This brings us to the general mechanism design problem, or "implementation," the subject of Chapter 61: how to design the "rules of the game" to achieve certain desired results (as in auctions, matching markets, and final offer arbitration). The last chapter, 62, discusses some of the interplay between theory and experiments in games, and also the role that game theory plays in the design of interactive simulations (as in business games and war games).

This concludes our summary of the contents of the Handbook. Unfortunately, certain topics that we planned to cover were in the end omitted for one reason or another. They include adaptive dynamic learning, social psychology, macroeconomics, and the history of game theory. Needless to say, game theory is constantly expanding its horizons and increasing its depth (as attested to by the large and varied participation in the First Congress of the Game Theory Society in 2000 in Bilbao). Thus, any coverage in a Handbook is necessarily incomplete.

We would like to thank heartily all the many people who were involved in this project: the contributors, referees, series editors, and all those who helped us with their advice and support. Finally, we are grateful to our editorial assistant Mike Borns, without whom this volume would never have been completed.

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