Editing Dynamic inconsistency (section)

==In game theory==
{{refimprove section|date=February 2009}}
In the context of [[game theory]], dynamic inconsistency is a situation in a [[dynamic game]] where a player's best plan for some future period will not be optimal when that future period arrives. A dynamically inconsistent game is [[subgame perfect equilibrium|subgame imperfect]]. In this context, the inconsistency is primarily about [[Personal commitment|commitment]] and [[Non-credible threat|credible threats]]. This manifests itself through a violation of [[Bellman's Principle of Optimality]] by the leader or dominant player, as shown in {{harvs |last1=Simaan|last2=Cruz|year=1973a|year2=1973b|txt=yes }}.

For example, a [[business|firm]] might want to commit itself to dramatically dropping the [[price]] of a product it sells if a rival firm enters its [[Market (economics)|market]]. If this threat were credible, it would discourage the rival from entering. However, the firm might not be able to commit its future self to taking such an action because if the rival does in fact end up entering, the firm's future self might determine that, given the fact that the rival is now actually in the market and there is no point in trying to discourage entry, it is now not in its interest to dramatically drop the price. As such, the threat would not be credible. The present self of the firm has preferences that would have the future self be committed to the threat, but the future self has preferences that have it not carry out the threat. Hence, the dynamic inconsistency.<!-- game theory has the idea of making binding commitments to avoid these inconsistencies; we should link to an article covering these commitments. -->