Dynamic games of complete and perfect information:

We will  consider the dynamic games or the  sequential move games. We again restrict  our  attention  to games with  complete  information (i.e., games  in which players' payoffs are common knowledge). We will analyse sequential games that are not only complete but also "perfect information",  by  which  we  mean,  at each move in the game the player with move knows the  full  history of the play  of the game thus far.

We  consider  games of complete  but imperfect information. The central issue  in  all dynamic game  is credibility. As an example of a non- credible threat consider the following two-stage game.

In a two-stage game, first player  1  chooses between giving player 2 Rs. 1000 or nothing. Then player  2 observes player  1's move  and  chooses whether or not  to  explode a  grenade  that  will kill both  of  them. Suppose  player  2 threatens  to explode the grenade unless playerl  pays her Rs. 1000. If player believes  the  threat,  then  playerl's  best  response  is  to  pay  the  money.  But player 1 should not believe  the  threat, because  it  is  a non-credible threat.  If player 2 was given the opportunity to carry out the  threat, she would choose not to explode it  (provided that she is rational). Therefore player  1 should pay nothing to player 2.