SummaryIn this first Learning Path on Game theory, we learn about the main tools and conditions required in order to make a thorough analysis of games. We see how the quality of information shape the way we solve games, and learn about how to describe them.
Common knowledge is a condition usually required in game theory, so the model is completely specified and its analysis is coherently undertaken. It completes the notion of complete information, which requires all players to know the rules of the game and each other’s utility function. Indeed, all players should also be required to be aware of this fact; this is, all players must be aware of the awareness of the other players regarding the rules and each other’s utility functions. Furthermore, each player must be aware that each player is aware that each player is aware, and so on. To sum up, the awareness of the description of a given game must be part of that description.
This condition implies that each player will be fully rational (understood as rational agents, that form and adapt their expectations as rational expectations). It also implies that each player will have to take into consideration how other players face their maximisation problems, in order to make rational choices. Therefore, common knowledge is the starting point of Nash equilibriums.