Eco514-Game Theory lecture 11: Subgame perfection Marciano siniscalchi October 21. 1999 Introduction The notion of subgame perfection is the cornerstone of the theory of extensive games. It embodies its key intuitions-and provides a vivid example of the difficulties inherent in such a theor But, above all, it has proved to be extremely profitable in a variety of applications. More- over, it has spawned a huge theoretical literature which has attempted(often successfully to overcome the limitations and or expand the domain of application of subgame-perfect equilibrium Subgame perfection The basic intuition is apparent in the entry deterrence game of Figure 1 1E2 1.1 N0.20.2 E|-111,1 0,2 Figure 1: The Entry Deterrence game and its normal form Player 1 is a potential entrant who may decide to Enter or Not Enter a market; followin ntry, the incumbent, Player 2, decides whether to Fight or AcquiesceEco514—Game Theory Lecture 11: Subgame Perfection Marciano Siniscalchi October 21, 1999 Introduction The notion of subgame perfection is the cornerstone of the theory of extensive games. It embodies its key intuitions—and provides a vivid example of the difficulties inherent in such a theory. But, above all, it has proved to be extremely profitable in a variety of applications. More￾over, it has spawned a huge theoretical literature which has attempted (often successfully) to overcome the limitations and/or expand the domain of application of subgame-perfect equilibrium. Subgame perfection The basic intuition is apparent in the entry deterrence game of Figure 1. 1,1 r 1 0,2 N E r 2 f a -1,-1 f a N 0,2 0,2 E -1,-1 1,1 Figure 1: The Entry Deterrence game and its normal form. Player 1 is a potential entrant who may decide to Enter or Not Enter a market; following entry, the incumbent, Player 2, decides whether to Fight or Acquiesce. 1