1
SOLUTION MANUAL FOR
STRATEGY: AN
INTRODUCTION TO GAME
THEORY THIRD EDITION
BY JOEL WATSON (AUTHOR)
LATEST UPDATE 2025/2026
1
, 2
Weeks Topics Chapters
A. R epresenting Games
1 Introduction, extensive form, strategies, 1-3
and normal form
1-2 Beliefs and mixed strategies 4-5
B. Analysis of S tatic Settings
2-3 Best response, rationalizability, applications 6-8
3-4 Equilibrium, applications 9-10
5 Other equilibrium topics 11-12
5 Contract, law, and enforcement 13
C. Analysis of Dynamic Settings
6 Backward induction, subgame perfection, 14-17
and an application
7 Bargaining 18-19
7-8 Negotiation equilibrium and problems of 20-21
contracting and investment
8-9 Repeated games, applications 22-23
D. Information
9 Random events and incomplete information 24
10 Bayesian equilibrium, application 26-27
10 Perfect Bayesian equilibrium and an application 28-29
2
, 3
E xperiments and a C ourse C ompetition
In addition to assigning regular problem sets, it can be fun and instructive to run a
course-long competition between the students. The competition is mainly for sharpening
the students‟ skills and intuition, and thus the students‟ performance in the course
competition should not count toward the course grades. The competi- tion consists of a
series of challenges, classroom experiments, and bonus questions. Students receive points
for participating and performing near the top of the class. Bonus questions can be sent by
e-mail; some experiments can be done by e-mail as well. Prizes can be awarded to the
winning students at the end of the term. Some suggestions for classroom games and bonus
questions appear in various places in this manual.
L evel of Mathematics and Use of Calculus
Game theory is a technical subject, so the students should come into the course
with the proper mathematics background. For example, students should be very
comfortable with set notation, algebraic manipulation, and basic probability theory.
Appendix A in the textbook provides a review of mathematics at the level used in the
book.
Some sections of the textbook benefit from the use of calculus. In particular, a few
examples and applications can be analyzed most easily by calculating derivatives. In
each case, the expressions requiring differentiation are simple polynomials (usually
quadratics). Thus, only the most basic knowledge of differentiation suffices to follow the
textbook derivations. You have two choices regarding the use of calculus.
First, you can make sure all of the students can differentiate simple polynomials; this
can be accomplished by either (a) specifying calculus as a prerequisite or (b) asking
the students to read Appendix A at the beginning of the course and then perhaps
reinforcing this by holding an extra session in the early part of the term to review how to
differentiate a simple polynomial.
Second, you can avoid calculus altogether by either providing the students with non-
calculus methods to calculate maxima or by skipping the textbook examples that use
calculus. Here is a list of the examples that are analyzed with calculus in the textbook:
• the partnership example in Chapters 8 and 9,
the Cournot application in Chapter 10 (and the tariff and crime applications in this
chapter, but the analysis of these applications is not done in the text),
• the Stackelberg example in Chapter 15,
the advertising and limit capacity applications in Chapter 16 (they are based on
the Cournot model),
3
, 4
• the dynamic oligopoly model in Chapter 23 (Cournot-based),
the discussion of risk-aversion in Chapter 25 (in terms of the shape of a utility
function),
• the Cournot example in Chapter 26, and
• the analysis of auctions in Chapter 27.
Each of these examples can be easily avoided, if you so choose. There are also some
related exercises that you might avoid if you prefer that your students not deal with
examples having continuous strategy spaces.
My feeling is that using a little bit of calculus is a good idea, even if calculus is not a
prerequisite for the game theory course. It takes only an hour or so to explain slope and
the derivative and to give students the simple rule of thumb for calculating partial
derivatives of simple polynomials. Then one can easily cover some of the most
interesting and historically important game theory applications, such as the Cournot
model and auctions.
4
SOLUTION MANUAL FOR
STRATEGY: AN
INTRODUCTION TO GAME
THEORY THIRD EDITION
BY JOEL WATSON (AUTHOR)
LATEST UPDATE 2025/2026
1
, 2
Weeks Topics Chapters
A. R epresenting Games
1 Introduction, extensive form, strategies, 1-3
and normal form
1-2 Beliefs and mixed strategies 4-5
B. Analysis of S tatic Settings
2-3 Best response, rationalizability, applications 6-8
3-4 Equilibrium, applications 9-10
5 Other equilibrium topics 11-12
5 Contract, law, and enforcement 13
C. Analysis of Dynamic Settings
6 Backward induction, subgame perfection, 14-17
and an application
7 Bargaining 18-19
7-8 Negotiation equilibrium and problems of 20-21
contracting and investment
8-9 Repeated games, applications 22-23
D. Information
9 Random events and incomplete information 24
10 Bayesian equilibrium, application 26-27
10 Perfect Bayesian equilibrium and an application 28-29
2
, 3
E xperiments and a C ourse C ompetition
In addition to assigning regular problem sets, it can be fun and instructive to run a
course-long competition between the students. The competition is mainly for sharpening
the students‟ skills and intuition, and thus the students‟ performance in the course
competition should not count toward the course grades. The competi- tion consists of a
series of challenges, classroom experiments, and bonus questions. Students receive points
for participating and performing near the top of the class. Bonus questions can be sent by
e-mail; some experiments can be done by e-mail as well. Prizes can be awarded to the
winning students at the end of the term. Some suggestions for classroom games and bonus
questions appear in various places in this manual.
L evel of Mathematics and Use of Calculus
Game theory is a technical subject, so the students should come into the course
with the proper mathematics background. For example, students should be very
comfortable with set notation, algebraic manipulation, and basic probability theory.
Appendix A in the textbook provides a review of mathematics at the level used in the
book.
Some sections of the textbook benefit from the use of calculus. In particular, a few
examples and applications can be analyzed most easily by calculating derivatives. In
each case, the expressions requiring differentiation are simple polynomials (usually
quadratics). Thus, only the most basic knowledge of differentiation suffices to follow the
textbook derivations. You have two choices regarding the use of calculus.
First, you can make sure all of the students can differentiate simple polynomials; this
can be accomplished by either (a) specifying calculus as a prerequisite or (b) asking
the students to read Appendix A at the beginning of the course and then perhaps
reinforcing this by holding an extra session in the early part of the term to review how to
differentiate a simple polynomial.
Second, you can avoid calculus altogether by either providing the students with non-
calculus methods to calculate maxima or by skipping the textbook examples that use
calculus. Here is a list of the examples that are analyzed with calculus in the textbook:
• the partnership example in Chapters 8 and 9,
the Cournot application in Chapter 10 (and the tariff and crime applications in this
chapter, but the analysis of these applications is not done in the text),
• the Stackelberg example in Chapter 15,
the advertising and limit capacity applications in Chapter 16 (they are based on
the Cournot model),
3
, 4
• the dynamic oligopoly model in Chapter 23 (Cournot-based),
the discussion of risk-aversion in Chapter 25 (in terms of the shape of a utility
function),
• the Cournot example in Chapter 26, and
• the analysis of auctions in Chapter 27.
Each of these examples can be easily avoided, if you so choose. There are also some
related exercises that you might avoid if you prefer that your students not deal with
examples having continuous strategy spaces.
My feeling is that using a little bit of calculus is a good idea, even if calculus is not a
prerequisite for the game theory course. It takes only an hour or so to explain slope and
the derivative and to give students the simple rule of thumb for calculating partial
derivatives of simple polynomials. Then one can easily cover some of the most
interesting and historically important game theory applications, such as the Cournot
model and auctions.
4
