**Meet the editor**

Hardy Hanappi was born in Vienna (1951) and studied economics and Informatics at the University of Vienna and the Technical University of Vienna, respectively. Before returning to university he worked as econometrician for OPEC, and as CEO for the consulting firm ECON GmbH. Afterwards, he became a university teacher and researcher at the TU-Vienna and concentrat-

ed on macroeconomics, political economy, simulation methods, and game theory. From 1992 till 1997, he was the deputy director of socioeconomics at the Austrian Academy of Sciences. After his return to the TU Vienna he became head of economics. From 2001 till 2005, he was also the director of the Institute for Monetary Economics (Ludwig Boltzmann-Institute). He is currently ad personam chair for political economy of European integration, a position granted by the European Commission. He is a professorial research associate at SOAS (University of London), where he spent a sabbatical in 2011. Hardy Hanappi now lives in Vienna.

Contents

**Preface IX** 

Hardy Hanappi

Chapter 3 **Inductive Game Theory:** 

**Section 1 Game Theory in the Social Sciences 1** 

Chapter 1 **The Neumann-Morgenstern Project –** 

**for the Social Sciences 3** 

Chapter 2 **Can Deterrence Lead to Fairness? 27** 

**Game Theory as a Formal Language** 

Riccardo Alberti and Atulya K. Nagar

Eizo Akiyama, Ryuichiro Ishikawa, Mamoru Kaneko and J. Jude Kline

Chapter 4 **A Tale of Two Ports: Extending the Bertrand** 

Chapter 5 **A Game Theoretic Approach Based Adaptive** 

Sheng Zeng and Emmanuel Fernandez

Chapter 6 **Models for Highway Cost Allocation 135**  Alberto Garcia-Diaz and Dong-Ju Lee

Naima Saeed and Odd I. Larsen

**Section 2 Game Theory in Engineering 105** 

**SISO Linear Systems 107** 

**Model Along the Needs of a Case Study 77** 

**Control Design for Sequentially Interconnected** 

Chapter 7 **A Game Theoretic Analysis of Price-QoS Market Share in Presence of Adversarial Service Providers 157**  Mohamed Baslam, Rachid El-Azouzi, Essaid Sabir, Loubna Echabbi and El-Houssine Bouyakhf

**A Simulation Study of Learning a Social Situation 55** 

## Contents

#### **Preface XI**

**Section 1 Game Theory in the Social Sciences 1**  Chapter 1 **The Neumann-Morgenstern Project – Game Theory as a Formal Language for the Social Sciences 3**  Hardy Hanappi Chapter 2 **Can Deterrence Lead to Fairness? 27**  Riccardo Alberti and Atulya K. Nagar Chapter 3 **Inductive Game Theory: A Simulation Study of Learning a Social Situation 55**  Eizo Akiyama, Ryuichiro Ishikawa, Mamoru Kaneko and J. Jude Kline Chapter 4 **A Tale of Two Ports: Extending the Bertrand Model Along the Needs of a Case Study 77**  Naima Saeed and Odd I. Larsen **Section 2 Game Theory in Engineering 105**  Chapter 5 **A Game Theoretic Approach Based Adaptive Control Design for Sequentially Interconnected SISO Linear Systems 107**  Sheng Zeng and Emmanuel Fernandez Chapter 6 **Models for Highway Cost Allocation 135**  Alberto Garcia-Diaz and Dong-Ju Lee Chapter 7 **A Game Theoretic Analysis of Price-QoS Market Share in Presence of Adversarial Service Providers 157** 

> Mohamed Baslam, Rachid El-Azouzi, Essaid Sabir, Loubna Echabbi and El-Houssine Bouyakhf

X Contents


## Preface

The scientific discipline called game theory has now reached the age of 71, the age which reminds ordinary human individuals of retirement. Fortunately enough, profound scientific achievements do not lose their powers at the same speed as their human creators. If they provide exciting new ideas and are able to stimulate a broader scientific community, then they can become a public good, a precious intellectual heritage, which is passed on from generation to generation of researchers. And even if such theories are proven to be only special cases of a more general approach, or are even falsified, their preliminary impasses or mistakes are usually acknowledged as necessary steps towards state-of-the art knowledge. There is no need for a pension system; such a theory lives on as an ingredient of ever expanding human knowledge.

When game theory entered the scientific arena in the 40s of the last century, it was a highly acclaimed new star. A star launched by one of the most admired mathematical geniuses of the century, John von Neumann. In contrast to these high aspirations, the name of the new discipline - 'Game Theory' – at first sight suggested that it might be not really a serious scientific project. It reminded of playing games, of card games like poker, or board games like chess, or even of children not being able to understand how to spend time in serious activities and thus having to train their abilities in metaphorical game play. The tension between the most stern and most abstract scientific discipline, mathematics, on the one hand, and on the other hand, the reference to the *homo ludens*, the fun of exploring reality by acting in sheltered simulated contexts, explains to some extent why game theory immediately was attractive to many young scientists on both sides of the Atlantic. It also explains why any attempt to change this name (some more 'serious' researchers have proposed to call it *Theory of Strategic Behavior*) should be avoided. Game theory still thrives on its ability to be sufficiently rigorous and open to a wide range of metaphorical game play at the same time. This is why it is so charming.

Additional profile came from the science onto which its two creators, John von Neumann and Oskar Morgenstern, decided to graft the new apparatus: economic theory. After the Great Depression of the world economy in the 30s, few scientific disciplines were visibly in a more disastrous state than economics. In tight cooperation with the trained economist Morgenstern, the extremely ambitious John von Neumann jumped on this subject to revolutionize it. But in doing so, the two underestimated the

#### XII Preface

resistance against deep changes, which is an unavoidable characteristic of established researchers trying to defend their own, with life-long great difficulties acquired, intellectual capital. The relatively sudden dismissal of game theory as a scientific fashion, immediately after John von Neumann's death in the 50s, certainly has another root in the long-run upswing of a reconstructing world economy, which seemed to need no revolutionized economic theory. Some piece-meal social engineering based on Keynes ideas, plus the mathematical framework of Paul Samuelson's 'Neoclassical Synthesis', seemed to be good enough to run the show. In economic theory, game theory was out, and left to some mathematical 'nerds' who were mainly elaborating refinements along the lines of John Nash's equilibrium approach to game-theoretic questions.

Preface XI

**Hardy Hanappi**

Austria

University of Technology Vienna,

patience and wise consultation made this book possible. This type of publishing, provided by publishers like InTech, will hopefully not only help young and innovative researchers in many countries, but also benefit students around the world. This book is

dedicated to them.

But ignorance of the economic mainstream could not kill the beast. The last three decades saw a slowly starting, but exponentially rising influence of game theory in surprisingly different fields of science. In its old domain, the social sciences (mainly political economy), it is now hard to imagine that an innovative paper can succeed without at least apologizing for why it doesn't use a more appropriate game-theoretic approach. But in many other areas – from biology via abstract network theory to ICT engineering – game-theoretic modeling has reappeared as an indispensable tool.

This is the very reason why this book is called '**Game Theory Relaunched**'. Which parts of game theory are used, and which kind of further development is contributed to game theory by the respective research, does, of course, assume different forms, which in turn depends on the respective discipline. Game theory is still not a finalized body of knowledge – and (as chapter 1 argues) will not be for a very long time to come. Many existing textbooks on game theory therefore spend most of their pages on describing the very specific history of refinements of Nash's equilibrium concept – and mention the actually happening renaissance of game-theoretic thought across different disciplines and engineering activities as an exotic outlier at best. The collection in this book takes a different perspective; it proceeds along the lines of currently developed game-theoretic work. At the current stage of the renaissance of game theory, all that can be done is to collect and to structure the diverse contributions: The book thus consists of four parts containing (1) social science oriented chapters, (2) chapters related to engineering problems, (3) chapters enhancing the mathematics of game theory, and (4) chapters that stress the transdisciplinary character of game theory. By working through this mosaic of building blocks of game theory, the reader can hopefully get an impression of the breadth and depth of the intellectual potential, which the founders of this theory had envisaged.

All the chapters have been written by different authors spread all over the globe, and thus showing how international the game theoretic community already is these days. It has been my honor to collect and edit their contributions, but the intellectual surplus they produced is completely their own merit. Special thanks have to also go to InTech Publisher, and in particular to publishing process manager Oliver Kurelic, whose patience and wise consultation made this book possible. This type of publishing, provided by publishers like InTech, will hopefully not only help young and innovative researchers in many countries, but also benefit students around the world. This book is dedicated to them.

X Preface

questions.

resistance against deep changes, which is an unavoidable characteristic of established researchers trying to defend their own, with life-long great difficulties acquired, intellectual capital. The relatively sudden dismissal of game theory as a scientific fashion, immediately after John von Neumann's death in the 50s, certainly has another root in the long-run upswing of a reconstructing world economy, which seemed to need no revolutionized economic theory. Some piece-meal social engineering based on Keynes ideas, plus the mathematical framework of Paul Samuelson's 'Neoclassical Synthesis', seemed to be good enough to run the show. In economic theory, game theory was out, and left to some mathematical 'nerds' who were mainly elaborating refinements along the lines of John Nash's equilibrium approach to game-theoretic

But ignorance of the economic mainstream could not kill the beast. The last three decades saw a slowly starting, but exponentially rising influence of game theory in surprisingly different fields of science. In its old domain, the social sciences (mainly political economy), it is now hard to imagine that an innovative paper can succeed without at least apologizing for why it doesn't use a more appropriate game-theoretic approach. But in many other areas – from biology via abstract network theory to ICT engineering – game-theoretic modeling has reappeared as an indispensable tool.

This is the very reason why this book is called '**Game Theory Relaunched**'. Which parts of game theory are used, and which kind of further development is contributed to game theory by the respective research, does, of course, assume different forms, which in turn depends on the respective discipline. Game theory is still not a finalized body of knowledge – and (as chapter 1 argues) will not be for a very long time to come. Many existing textbooks on game theory therefore spend most of their pages on describing the very specific history of refinements of Nash's equilibrium concept – and mention the actually happening renaissance of game-theoretic thought across different disciplines and engineering activities as an exotic outlier at best. The collection in this book takes a different perspective; it proceeds along the lines of currently developed game-theoretic work. At the current stage of the renaissance of game theory, all that can be done is to collect and to structure the diverse contributions: The book thus consists of four parts containing (1) social science oriented chapters, (2) chapters related to engineering problems, (3) chapters enhancing the mathematics of game theory, and (4) chapters that stress the transdisciplinary character of game theory. By working through this mosaic of building blocks of game theory, the reader can hopefully get an impression of the breadth and depth of the intellectual potential,

All the chapters have been written by different authors spread all over the globe, and thus showing how international the game theoretic community already is these days. It has been my honor to collect and edit their contributions, but the intellectual surplus they produced is completely their own merit. Special thanks have to also go to InTech Publisher, and in particular to publishing process manager Oliver Kurelic, whose

which the founders of this theory had envisaged.

**Hardy Hanappi** University of Technology Vienna, Austria

**Section 1** 

**Game Theory in the Social Sciences** 

**Game Theory in the Social Sciences** 

**Chapter 1** 

© 2013 Hanappi, licensee InTech. This is an open access chapter distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use,

distribution, and reproduction in any medium, provided the original work is properly cited.

© 2013 Hanappi, licensee InTech. This is a paper distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

The need for a re-integrative attempt of the basic tenets of a theory of games probably currently is felt most urgently in the area of political economy. In this area the mainstream theory of economic policy seems to be particularly helpless when confronted with questions arising in times of global economic crisis. To answer most of these questions would require to formulate, non-linear strategic behavior in situations of disequilibrium, a task which the

In 1942 John von Neumann and Oskar Morgenstern published their book 'Theory of Games and Economic Behavior'. The impact of this book on the scientific community and in particular on the further development of the social sciences was tremendous. John von Neumann's reputation as a mathematical genius and Oskar Morgenstern's ability to contribute truly innovative and original ideas to economic theory helped to spread the fame of their monumental masterpiece. Since this first wave of excitement in the last 70 years the theory of games has experienced a rather mixed fate, periods of ignorance changing with periods of redirection towards new fields of interest, or even new re-definition of its basic aims. There is no doubt that in each of these emerging sideways towards which specific scientific communities modified the original formal framework tremendous scientific progress was stimulated. The range of the diversity of the affected fields can hardly be exaggerated; it reaches from political economy via sociology and psychology to pure mathematics. But the price paid for these wide-spread singular success stories was another effect accompanying it: an increasing disintegration of the original project. Moreover the incredible swelling of research papers in each area during the last decades made it impossible even for large research teams – to survey what was going on with the use of the theory of games in science. This is the starting point for the line of argument presented in this chapter.

**The Neumann-Morgenstern Project ‒** 

**Game Theory as a Formal Language** 

**for the Social Sciences** 

Additional information is available at the end of the chapter

Hardy Hanappi

**1. Introduction** 

http://dx.doi.org/10.5772/56106
