Lesson 258
Game Theory & Mechanism Design
Strategy, equilibrium, and designing the rules
1:00How to analyze strategic interactions with payoff matrices, find Nash equilibria, and then reverse the problem — designing rules so that selfish play reaches the outcome you want.
By the end, you can
- Define the three ingredients of a game and explain what a payoff matrix encodes.
- Identify a dominant strategy by comparing payoffs across every opponent strategy.
- Determine whether a cell in a payoff matrix is a Nash equilibrium by checking unilateral deviations.
- Explain why the prisoner's dilemma Nash equilibrium is Pareto-inferior to mutual cooperation.
- Describe mechanism design as the inverse of game theory and give a real-world example.
- Explain why truth-telling is a dominant strategy in a second-price auction.
- Describe what the VCG mechanism charges and why it achieves incentive compatibility.
- State the revelation principle and Gibbard–Satterthwaite, and explain why transfers help auctions where voting fails.
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