Economics Game Theory Questions
Subgame perfect equilibrium is a solution concept in game theory that focuses on the strategic behavior of players within subgames, which are smaller games that arise during the course of a larger game. In order for a strategy profile to be considered a subgame perfect equilibrium, it must satisfy two conditions: first, it must be a Nash equilibrium in every subgame of the larger game, meaning that no player has an incentive to unilaterally deviate from their chosen strategy given the strategies of the other players. Second, it must also be consistent with the strategies chosen in the larger game. This means that the strategies chosen in the subgames must be consistent with the strategies chosen in the initial stage of the game. In other words, the subgame perfect equilibrium captures the idea that players are rational and forward-looking, taking into account the consequences of their actions not only in the immediate subgame but also in the subsequent stages of the game.