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 Game theory models strategic
behavior by agents who
understand that their actions
affect the actions of other agents.
 The study of oligopolies (industries
containing only a few firms)
 The study of cartels; e.g. OPEC
 The study of externalities; e.g. using a
common resource such as a fishery.
 The study of military strategies.
 A game consists of
◦ a set of players
◦ a set of strategies for each player
◦ the payoffs to each player for every possible
list of strategy choices by the players.
 A game with just two players is a two-player
game.
 We will study only games in which there are two
players, each of whom can choose between
only two strategies.
 The players are called A and B.
 Player A has two strategies, called “Up” and
“Down”.
 Player B has two strategies, called “Left” and
“Right”.
 The table showing the payoffs to both players
for each of the four possible strategy
combinations is the game’s payoff matrix.
This is the
game’s
payoff matrix.
Player B
Player A
Player A’s payoff is shown first.
Player B’s payoff is shown second.
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
E.g. if A plays Up and B plays Right then
A’s payoff is 1 and B’s payoff is 8.
This is the
game’s
payoff matrix.
Player B
Player A
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
And if A plays Down and B plays Right
then A’s payoff is 2 and B’s payoff is 1.
This is the
game’s
payoff matrix.
Player B
Player A
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
A play of the game is a pair such as (U,R)
where the 1st element is the strategy
chosen by Player A and the 2nd is the
strategy chosen by Player B.
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
What plays are we likely to see for this
game?
Player B
Player A
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
Is (U,R) a
likely play?
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
If B plays Right then A’s best reply is Down
since this improves A’s payoff from 1 to 2.
So (U,R) is not a likely play.
Is (U,R) a
likely play?
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
Is (D,R) a
likely play?
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
Is (D,R) a
likely play?
If B plays Right then A’s best reply is Down.
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
If B plays Right then A’s best reply is Down.
If A plays Down then B’s best reply is Right.
So (D,R) is a likely play.
Is (D,R) a
likely play?
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
Is (D,L) a
likely play?
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
If A plays Down then B’s best reply is Right,
so (D,L) is not a likely play.
Is (D,L) a
likely play?
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
Is (U,L) a
likely play?
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
If A plays Up then B’s best reply is Left.
Is (U,L) a
likely play?
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
If A plays Up then B’s best reply is Left.
If B plays Left then A’s best reply is Up.
So (U,L) is a likely play.
Is (U,L) a
likely play?
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
 A play of the game where each strategy is a
best reply to the other is a Nash equilibrium.
 Our example has two Nash equilibria; (U,L) and
(D,R).
Player B
Player A
(U,L) and (D,R) are both Nash equilibria for
the game.
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
Player B
Player A
(U,L) and (D,R) are both Nash equilibria for
the game. But which will we see? Notice
that (U,L) is preferred to (D,R) by both
players. Must we then see (U,L) only?
L R
U
D
(3,9)
(0,0)
(1,8)
(2,1)
 To see if Pareto-preferred outcomes must
be what we see in the play of a game,
consider a famous second example of a
two-player game called the Prisoner’s
Dilemma.
What plays are we likely to see for this
game?
Clyde
Bonnie
(-5,-5) (-30,-1)
(-1,-30) (-10,-10)
S
C
S C
If Bonnie plays Silence then Clyde’s best
reply is Confess.
Clyde
Bonnie
(-5,-5) (-30,-1)
(-1,-30) (-10,-10)
S
C
S C
If Bonnie plays Silence then Clyde’s best
reply is Confess.
If Bonnie plays Confess then Clyde’s
best reply is Confess.
Clyde
Bonnie
(-5,-5) (-30,-1)
(-1,-30) (-10,-10)
S
C
S C
So no matter what Bonnie plays, Clyde’s
best reply is always Confess.
Confess is a dominant strategy for Clyde.
Clyde
Bonnie
(-5,-5) (-30,-1)
(-1,-30) (-10,-10)
S
C
S C
Similarly, no matter what Clyde plays,
Bonnie’s best reply is always Confess.
Confess is a dominant strategy for
Bonnie also.
Clyde
Bonnie
(-5,-5) (-30,-1)
(-1,-30) (-10,-10)
S
C
S C
So the only Nash equilibrium for this
game is (C,C), even though (S,S) gives
both Bonnie and Clyde better payoffs.
The only Nash equilibrium is inefficient.
Clyde
Bonnie
(-5,-5) (-30,-1)
(-1,-30) (-10,-10)
S
C
S C
 In both examples the players chose their
strategies simultaneously.
 Such games are simultaneous play games.
 But there are games in which one player plays
before another player.
 Such games are sequential play games.
 The player who plays first is the leader. The
player who plays second is the follower.
 A game with a finite number of players, each
with a finite number of pure strategies, has at
least one Nash equilibrium.
 So if the game has no pure strategy Nash
equilibrium then it must have at least one mixed
strategy Nash equilibrium.

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Game theory

  • 1.
  • 2.  Game theory models strategic behavior by agents who understand that their actions affect the actions of other agents.
  • 3.  The study of oligopolies (industries containing only a few firms)  The study of cartels; e.g. OPEC  The study of externalities; e.g. using a common resource such as a fishery.  The study of military strategies.
  • 4.  A game consists of ◦ a set of players ◦ a set of strategies for each player ◦ the payoffs to each player for every possible list of strategy choices by the players.
  • 5.  A game with just two players is a two-player game.  We will study only games in which there are two players, each of whom can choose between only two strategies.
  • 6.  The players are called A and B.  Player A has two strategies, called “Up” and “Down”.  Player B has two strategies, called “Left” and “Right”.  The table showing the payoffs to both players for each of the four possible strategy combinations is the game’s payoff matrix.
  • 7. This is the game’s payoff matrix. Player B Player A Player A’s payoff is shown first. Player B’s payoff is shown second. L R U D (3,9) (0,0) (1,8) (2,1)
  • 8. E.g. if A plays Up and B plays Right then A’s payoff is 1 and B’s payoff is 8. This is the game’s payoff matrix. Player B Player A L R U D (3,9) (0,0) (1,8) (2,1)
  • 9. And if A plays Down and B plays Right then A’s payoff is 2 and B’s payoff is 1. This is the game’s payoff matrix. Player B Player A L R U D (3,9) (0,0) (1,8) (2,1)
  • 10. Player B Player A A play of the game is a pair such as (U,R) where the 1st element is the strategy chosen by Player A and the 2nd is the strategy chosen by Player B. L R U D (3,9) (0,0) (1,8) (2,1)
  • 11. What plays are we likely to see for this game? Player B Player A L R U D (3,9) (0,0) (1,8) (2,1)
  • 12. Player B Player A Is (U,R) a likely play? L R U D (3,9) (0,0) (1,8) (2,1)
  • 13. Player B Player A If B plays Right then A’s best reply is Down since this improves A’s payoff from 1 to 2. So (U,R) is not a likely play. Is (U,R) a likely play? L R U D (3,9) (0,0) (1,8) (2,1)
  • 14. Player B Player A Is (D,R) a likely play? L R U D (3,9) (0,0) (1,8) (2,1)
  • 15. Player B Player A Is (D,R) a likely play? If B plays Right then A’s best reply is Down. L R U D (3,9) (0,0) (1,8) (2,1)
  • 16. Player B Player A If B plays Right then A’s best reply is Down. If A plays Down then B’s best reply is Right. So (D,R) is a likely play. Is (D,R) a likely play? L R U D (3,9) (0,0) (1,8) (2,1)
  • 17. Player B Player A Is (D,L) a likely play? L R U D (3,9) (0,0) (1,8) (2,1)
  • 18. Player B Player A If A plays Down then B’s best reply is Right, so (D,L) is not a likely play. Is (D,L) a likely play? L R U D (3,9) (0,0) (1,8) (2,1)
  • 19. Player B Player A Is (U,L) a likely play? L R U D (3,9) (0,0) (1,8) (2,1)
  • 20. Player B Player A If A plays Up then B’s best reply is Left. Is (U,L) a likely play? L R U D (3,9) (0,0) (1,8) (2,1)
  • 21. Player B Player A If A plays Up then B’s best reply is Left. If B plays Left then A’s best reply is Up. So (U,L) is a likely play. Is (U,L) a likely play? L R U D (3,9) (0,0) (1,8) (2,1)
  • 22.  A play of the game where each strategy is a best reply to the other is a Nash equilibrium.  Our example has two Nash equilibria; (U,L) and (D,R).
  • 23. Player B Player A (U,L) and (D,R) are both Nash equilibria for the game. L R U D (3,9) (0,0) (1,8) (2,1)
  • 24. Player B Player A (U,L) and (D,R) are both Nash equilibria for the game. But which will we see? Notice that (U,L) is preferred to (D,R) by both players. Must we then see (U,L) only? L R U D (3,9) (0,0) (1,8) (2,1)
  • 25.  To see if Pareto-preferred outcomes must be what we see in the play of a game, consider a famous second example of a two-player game called the Prisoner’s Dilemma.
  • 26. What plays are we likely to see for this game? Clyde Bonnie (-5,-5) (-30,-1) (-1,-30) (-10,-10) S C S C
  • 27. If Bonnie plays Silence then Clyde’s best reply is Confess. Clyde Bonnie (-5,-5) (-30,-1) (-1,-30) (-10,-10) S C S C
  • 28. If Bonnie plays Silence then Clyde’s best reply is Confess. If Bonnie plays Confess then Clyde’s best reply is Confess. Clyde Bonnie (-5,-5) (-30,-1) (-1,-30) (-10,-10) S C S C
  • 29. So no matter what Bonnie plays, Clyde’s best reply is always Confess. Confess is a dominant strategy for Clyde. Clyde Bonnie (-5,-5) (-30,-1) (-1,-30) (-10,-10) S C S C
  • 30. Similarly, no matter what Clyde plays, Bonnie’s best reply is always Confess. Confess is a dominant strategy for Bonnie also. Clyde Bonnie (-5,-5) (-30,-1) (-1,-30) (-10,-10) S C S C
  • 31. So the only Nash equilibrium for this game is (C,C), even though (S,S) gives both Bonnie and Clyde better payoffs. The only Nash equilibrium is inefficient. Clyde Bonnie (-5,-5) (-30,-1) (-1,-30) (-10,-10) S C S C
  • 32.  In both examples the players chose their strategies simultaneously.  Such games are simultaneous play games.
  • 33.  But there are games in which one player plays before another player.  Such games are sequential play games.  The player who plays first is the leader. The player who plays second is the follower.
  • 34.  A game with a finite number of players, each with a finite number of pure strategies, has at least one Nash equilibrium.  So if the game has no pure strategy Nash equilibrium then it must have at least one mixed strategy Nash equilibrium.