NTU MBA

Games, Information and Strategy (4/16)

2012/03/15

Integrative Framework
Information Asymmetry
Strategic Moves: Non-cooperative Games
(Compellence, Deterrence) X (Promises, Threats)

Cooperative Games & Negotiation

Mechanism Design & Deal Structuring

Institution

Socially Optimal?
2

Textbooks
2009
2007

Course Schedule

Parts 1 & 2
Sessions 1-4

Part 3
Sessions 5-8

Midterm Exam
Session 9

Part 4 and Other Applications

Sessions 10-16

Final Exam
Session 17 or 18
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Main Themes (1/2)

Part 1: Introduction and general principles

Basic ideas and examples How to think about strategic games

Part 2: Concepts and techniques

Rationality and equilibrium Non-cooperative and cooperative games Sequential and simultaneous moves Discrete and continuous strategies Zero-sum and non-zero-sum games Pure and mixed strategies
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Main Themes (2/2)

Part 3: Some broad classes of games and strategies

Uncertainty and information Strategic moves Prisoners dilemma and repeated games Collective-action games Evolutionary games Mechanism design

Part 4: Applications to specific strategic situations

Brinkmanship Strategy and voting Bidding strategy and auction design Bargaining Markets and competition
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Information Categories

Poker Examples of Info Classification

1. 2. 3. 4.

5.
6.

Perfect, certain Incomplete, symmetric, certain Incomplete, asymmetric, certain Complete, asymmetric, certain Perfect, uncertain Incomplete, asymmetric, certain
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Simultaneous-Move Games with Mixed Strategies

Best Response
Prevent-exploitation method (for zero-sum game) Keep-the-opponent-indifferent method (for non-zero-sum game)

Themes

What does a mixed strategy accomplish?

The row players perspective The column players perspective

Equilibrium in mixed strategies

Prevent-exploitation method Keep-the-opponent indifferent curve

Mixing in non-zero-sum games

Chicken The battle of the two cultures

Further discussion of mixed strategies

The odds method Counterintuitive outcomes with mixed strategies Using mixed strategies in practice

Mixing when one player has three or more pure strategies

A general case A coincidental case

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11

-3 -1 +1

Zero-sum game Dominant strategy Information (and knowledge) Pure strategy Simultaneous-move game? Mixed strategy
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The General 2-by-2 Game

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2-by-2 Games with Mixed-Strategy Equilibria

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Police vs. Thief (Constant Sum = 3)

Police Patrol A Patrol B Thief Steal A 3, 0 1, 2 Steal B 2, 1 3, 0

No pure strategy N.E. (constant-sum or zero-sum game) Pure strategy? Police (Patrol A), Thief (Steal B), Payoff = (2,1) P T Patrol A (p) 2/3 Steal A (q) 1/3 3, 0 Steal B (1 q) 2/3 2, 1 q-Mix 3q + 2(1 q), (1 q)

Patrol B (1 p) 1/3
p-Mix

1, 2
3p + (1 p), 2(1 p)

3, 0
2p + 3(1 p), p

q + 3(1 q), 2q

Mixed strategies: Payoff = (7/3, 2/3) p:(1 p) = 2:1, p = 2/3, (1 p) = 1/3 q:(1 q) = 1:2, q = 1/3, (1 q) = 2/3 [2(1 p) = p => p = 2/3; 3q + 2(1 q) = q + 3(1 q) => q = 1/3] Police: pA + (1 p)B = 2/3(1/3 x 3 + 2/3 x 2) + 1/3(1/3 x 1 + 2/3 x 3) = 7/3 Thief: qA + (1 q)B = 1/3(2/3 x 0 + 1/3 x 2) + 2/3(2/3 x 1 + 1/3 x 0) = 2/3
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Thiefs Expected Payoff

Steal A
1

Steal B

2/3
0 0 0.2 0.4 0.6

2/3

0.8

1.0

% (Police Patrol A) (p)

7/3

Patrol A

Polices Expected Payoff

Patrol B
1 0 0 0.2

1/3

0.4

0.6

0.8

1.0

% (Thief Steal A) (q)

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Mixed Strategy: Operation Overlord

Probabilities of Allied Success
German Defense
Normandy Allied Landing Normandy Calais Calais

Allied Point Scores

German Defense Normandy Calais

75% 100%

100% 20%

Allied Landing

Normandy Calais

60 100

80 20

Allied Payoff (Zero-Sum)

Successful landing Normandy: 80 Calais: 100 Failure: 0

Mixed Strategy
Allies N:C = (100 20):(80 60) or 4:1

Germans N:C = (80 20):(100 60) or 3:2

Allied Payoff: 68; German Payoff: -68
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The Minimax Method & Mixed Strategy (1/3)

Prevent-exploitation method
Navratilova
DL (Down the line) DL Evert CC Minimax 90 max=90 Navratilova 20 max=80 50 CC (Crosscourt) 80

Maximin

min=50

Evert' s Maximin Choice of p 50 p 90(1 p) 80 p 20(1 p), or 70(1 p) 30 p, or 100 p 70, or p 0.7

min=20 Everts

success (%) Against Ns playing 90 DL and CC Mixed strategy (Maxmin)

80 62 50

DL DL (p) 50 90

CC 80 20 min=50

Evert

CC (1 p)

20
min=20

p-mix

50p + 90(1 p)

80p + 20(1 p)

Min=? (62)

0.7 1 Everts p-mix

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The Minimax Method & Mixed Strategy (2/3)

Prevent-exploitation method
Navratilova DL (Down the line) DL Evert CC 90 20 50 CC (Crosscourt) 80 Maximin

min=50

Navratilova' s Minimax Choice of q 50q 80(1 q ) 90q 20(1 q ), 60(1 q ) 40q, 100q 60, q 0.6

min=20 Everts

Minimax

max=90
Navratilova

max=80

success (%) Against Es playing 80 DL and CC

Mixed strategy (Minimax)

90 62 50

DL (q) DL Evert CC 50 90 max=90

CC (1 q) 80 20 max=80

q-mix 50q + 80(1 q) 90q + 20(1 q) max=? (62)

20 0 0.6 1 Navratilovas q-mix

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The Minimax Method & Mixed Strategy (3/3)

Everts success (%) Against Ns playing 90 DL and CC Mixed strategy (Maxmin) 80 62 50 Everts success (%) Against Es playing 80 DL and CC Mixed strategy (Minimax) 90 62 50

20 0 0.7 1 Everts p-mix

20 0 0.6 1 Navratilovas q-mix

1
q

1
p

1 (0, 1)
q 0.6 (0.7, 0.6)

0.7

0.6

(1, 0) 0.7 1

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Counterintuitive Outcomes?
Navratilova
DL (q) DL (p) Evert 50 30 CC (1 q) 80 q-mix 30q + 80(1 q)

CC (1 p)
p-mix

90
30p + 90(1 p)

20
80p + 20(1 p)

90q + 20(1 q)

Mixed strategy
30q + 80(1 q) = 90q + 20(1 q); q = 0.5 (0.6 0.5) 30p + 90(1 p) = 80p + 20(1 p); p = 7/12 or 0.583 (0.7 0.583)

Everts expected payoff

30*0.5 + 80*0.5 = 90*0.5 + 20*0.5 = 55 (62 55)

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Equilibrium: Minimax Value of Zero-Sum Game

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Multiple Equilibria in Pure Strategies

(Coordination Games)
Focal point, convergence of expectations, strategic moves
Pure Coordination (Meeting) Starbucks A Local Latte 0, 0 1, 1 B Starbucks Local Latte 1, 1 0, 0 Assurance Not build (N.W.) US Build (N.W.) Russia Not Build Build N.W. (N.W.)

4, 4
3, 1

1, 3
2, 2

Battle of the Sexes or Cultures Sports G Opera

L Sports 2, 1 0, 0 Opera 0, 0 1, 2 Chicken Swerve (Chicken) 0, 0 1, -1

B Straight (Tough) -1, 1 -2, -2

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Swerve (Chicken) A Straight (Tough)

Chicken (1/2)
B Mixed Strategy Swerve (q) Swerve (p) A Straight (1 p) p-Mix 0, 0 1, -1 1 p, -(1 p) = p 1 Straight (1 q) -1, 1 -2, -2 -p 2(1 p) = p 2, p 2(1 p) = 3p 2 q-Mix -(1 q) = q 1, 1q q 2(1 q) = 3q 2, -q 2(1 q) = q 2

Best response: Keep-the-opponent-indifferent method

A: q 1 = 3q 2 => q = 0.5 B: p 1 = 3p 2 => p = 0.5

Mixed strategy equilibrium: payoff = (-0.5, -0.5) Coordinated randomization: payoff = (0, 0)
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Chicken (2/2)
B payoff Upper envelope
1 0.5

A payoff A 1 Swerve p-mix Upper envelope 1 0.5 B 1 Swerve q-mix Straight A

1 (0, 1) (0.5, 0.5)

0
-0.5 -1

0
-0.5 -1 -2

-2
1

Straight B
1

q 0.5

(1, 0) 0 0.5 p 1 0 0.5 q 1 0 0.5 p 1

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The Battle of Two Cultures (1/2)

H Mixed Strategy Lab (q) Lab (p) S Theater (1 p) p-Mix 2, 1 0, 0 2p, p Theater (1 q) 0, 0 1, 2 1 p, 2(1 p) q-Mix 2q, q 1 q, 2(1 q)

Best response: Keep-the-opponent-indifferent method

Sciences: 2q = 1 q => q = 1/3 Humanities: p = 2(1 p) => p = 2/3

Mixed strategy equilibrium: payoff = (2/3, 2/3) Coordinated randomization: payoff = (1.5, 1.5)
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The Battle of Two Cultures (2/2)

Humanities payoff
2 Humanities choose Theater and Lab 1 1

Sciences payoff
Sciences choose Theater and Lab 2

1
q

2/3

1
p

S p-mix 1

1/3

1 (0, 1)
q
1/3 (2/3, 1/3)

H q-mix 1

0 p

2/3

1/3 q

0 p

(1, 0) 2/3 1
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Zero-Sum Game (No Pure Strategy N.E., Stable Mixed Strategy N.E.)
Pitcher Baseball Game Fast Ball (p) Slow Ball (1 p) p-Mix Early Swing (q) 10, -10 -5, 5 10p 5(1 p) = 15p 5 Batter Late Swing (1 q ) -5, 5 3, -3 -5p + 3(1 p) = 3 8p q-Mix -10q + 5(1 q) = 5 15q 5q - 3(1 q) = 8q 3 5 15q = 8q 3 15p 5 = 3 8p => q = 8/23 => p = 8/23
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Batters Expected Payoff

Early Swing

0.22
0 -5 0

Late Swing

0.2

8/23 0.4

0.6

0.8

1.0

% (Pitcher Fast Ball) (p)

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Zero-Sum Game (No Pure Strategy N.E., Stable Mixed Strategy N.E.)
Pitcher Baseball Game Fast Ball (p) Slow Ball (1 p) p-Mix Early Swing (q) 10, -10 -5, 5 10p 5(1 p) = 15p 5 Batter Late Swing (1 q) -5, 5 3, -3 -5p + 3(1 p) = 3 8p q-Mix -10q + 5(1 q) = 5 15q 5q 3(1 q) = 8q 3 5 15q = 8q 3 15p 5 = 3 8p => q = 8/23 => p = 8/23
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Fast Ball -0.22

Slow Ball

Pitchers Expected Payoff

0
-5 -10

0.2

8/23 0.4

0.6

0.8

1.0

% (Batter Early Swing) (q)

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Non-Zero Sum Game (No Pure Strategy N.E., Stable Mixed Strategy N.E.)
Customer Promotion Today (p) Tomorrow (1 p) p-Mix Today (q) 5, 10 8, 4 5p + 8(1 p) = 8 3p Seller Tomorrow (1 q) 10, 5 4, 8 10p + 4(1 p) = 4 + 6p q-Mix 10q + 5(1 q) = 5 + 5q 4q + 8(1 q) = 8 4q 5 + 5q = 8 4q 8 3p = 4 + 6p => q = 1/3 => p = 4/9
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Sellers Expected Payoff

6.67
5

Today

Tomorrow

0 0 0.2 0.4 4/9 0.6 0.8 1.0

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% (Customer Today) (p)

Non-Zero Sum Game (No Pure Strategy N.E., Stable Mixed Strategy N.E.)
Customer Promotion Today (p) Tomorrow (1 p) p-Mix Today (q) 5, 10 8, 4 5p + 8(1 p) = 8 3p Seller Tomorrow (1 q) 10, 5 4, 8 10p + 4(1 p) = 4 + 6p q-Mix 10q + 5(1 q) = 5 + 5q 4q + 8(1 q) = 8 4q 5 + 5q = 8 4q 8 3p = 4 + 6p => q = 1/3 => p = 4/9
10

Customers Expected Payoff

6.67
5

Tomorrow

Today

0 0 0.2

1/3 0.4

0.6

0.8

1.0
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% (Seller Today) (q)

Coordination Game (2 Pure Strategy N.E., Unstable Mixed Strategy N.E.)

Polite Behavior
B Wait (p) Go First (1 p) p-Mix Wait (q) 0, 0 2, 3 0p + 2(1 p) = 2 2p A Go First (1 q) 3, 2 -1, -1 3p (1 p) = 4p 1 q-Mix 0q + 2(1 q) = 2 2q 3q (1 q) = 4q 1 2 2q = 4q 1 2 2p = 4p 1 => q = 1/2 => p = 1/2
3 2

Bs Expected Payoff

Wait
1 0 -1 0 0.2 0.4

Go First

1/2

0.6

0.8

1.0
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% (A Wait) (q)

Coordination Game (2 Pure Strategy N.E., Unstable Mixed Strategy N.E.)

Digging Well
A Deep (q) Shallow (1 q) q-Mix B Deep (p) Shallow (1 p) 10, 10 3, 15 15, 3 0, 0 7q + 3 15q 7q + 3 = 15q => q = 3/8 p-Mix 10p + 3(1 p) = 7p + 3 15p 0(1 p) = 15p 7p + 3 = 15p => p = 3/8 Shallow Well

15

Bs Expected Payoff

10

5 5.625
0 0 0.2

Deep Well

3/8 0.4

0.6

0.8

1.0

% (A Deep Well) (q)

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Prisoners Dilemma (1 Pure Strategy N.E., No Mixed Strategy N.E.)

Advertisement
A
No (q) Yes (1 q) q-Mix B No (p) Yes (1 p) 8, 8 2, 10 10, 2 4, 4 6q + 2 6q + 4 6q + 4 > 6q + 2 p-Mix 8p + 2(1 p) = 6p + 2 10p + 4(1 p) = 6p + 4 6p + 4 > 6p + 2

10 8

Advertise

Bs Expected Payoff

6 4 2 0 0.2 0.4 0.6

No Advertise

0.8

1.0
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% (A No Advertisement) (q)

Payoff Table for Tennis Point with Lob

Navratilova

DL (q) DL (p1) CC (p2)

Evert

CC (1 q) 80 20 60

q-Mix 50q + 80(1 q) 90q + 20(1 q) 70q + 60(1 q)

50 90 70

Lob (1 p1 p2)
p-Mix

50p1 + 90p2 + 70(1 p1 p2)

80p1 + 20 p2 + 60(1 p1 p2)

Indifferent between DL and Lob : 50q 80 1 q) 70 60(1 q), and q 1 / 2 0.5 Evert' s expected payoff 65 Indifferent between CC and Lob : 90q 20 1 q) 70 60(1 q), and q 2 / 3 0.667 Evert' s expected payoff 66.67 Evert' s best response is DL when q 0.5, CC when q 0.667, and Lob when 0.5 q 0.667
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Diagrammatic Solution for Ns q-Mix

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When Lob is Never a Best Response

Navratilova

DL (q) DL (p1) CC (p2)

Evert

CC (1 q) 80 20

q-Mix 50q + 80(1 q) 90q + 20(1 q)

50 90

Lob (1 p1 p2)

75
50p1 + 90p2 + 75(1 p1 p2)

30
80p1 + 20 p2 + 30(1 p1 p2)

75q + 30(1 q)

p-Mix

Evert' s response : DL is better than Lob when q 0.667, CC is better than Lob when q 0.4, and both DL and CC are better than Lob when 0.4 q 0.667 Evert' s mixed strategy : [50 p 90(1 p)]q [80 p 20(1 p)](1 q) [50q 80(1 q)] p [90q 20(1 q)](1 p) p 0.25 means mixture of DL with probability 0.25 and CC with probability 0.75 (the Mix line)
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Domination by a Mixed Strategy

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Odds Method
Mixed Strategy Up (p) Row Down (1 p) p-Mix Left (q) a, A c, C pa + (1 p)c, pA + (1 p)C

Column Right (1 q)
b, B d, D pb + (1 p)d, pB + (1 p)D

q-Mix qa + (1 q)b, pA + (1 p)B qc + (1 q)d, pC + (1 p)D

p:(1 p) = (D C):(A B); q:(1 q) = (d b):(a c)

Column

DL (q)
DL (p) Row CC (1 p) 50 90 50 90 = -40

CC (1 q)
80 20 20 80 = -60

q:(1 q) =6:4
50 80 = -30 20 90 = -70

p:(1 p) = 7:3

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RPS (Rock-Paper-Scissors) Game

Column Rock (q1) R (p1) P (p2) Row S (1 p1 p2) p-Mix

Paper (q2) -1 0

Scissors (1 q1 q2)
1 -1

q-Mix q2 + (1 q1 q2) q1 (1 q1 q2)

0 1

-1
p2 + (1 p1 p2)

1
p1 (1 p1 p2)

0
p1 + p2

q1 + q2

Row: p1 = p2 = (1 p1 p2) = 1/3 Column: q1 = q2 = (1 q1 q2) = 1/3 Mixed strategies: payoff = (0, 0)
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Football Game (1/2)

Defense Run (q1) Run (p1) Short Pass (p2) Long Pass (1 p1 p2) p-Mix

Pass (q2) 8 3 7 8p1 + 6p2 + 7(1 p1 p2)

Blitz (1 q1 q2) 13 6 -2 13p1 + 6p2 2(1 p1 p2)

q-Mix 2q1 + 8q2 + 13(1 q1 q2) 5q1 + 3q2 + 6(1 q1 q2) 10q1 + 7q2 2(1 q1 q2)

2 5 10 2p1 + 5p2 + 10(1 p1 p2)

Offense

Offenses conditions to prevent exploitation

2p1 + 5p2 + 10(1 p1 p2) = 8p1 + 6p2 + 7(1 p1 p2); 9p1 + p2 = 3 2p1 + 5p2 + 10(1 p1 p2) =13p1 + 6p2 2(1 p1 p2); 23p1 + 13p2 = 12 p1 = 27/94, p2 = 39/94, (1 p1 p2) = 28/94 2q1 + 8q2 + 13(1 q1 q2) = 5q1 + 3q2 + 6(1 q1 q2); 10q1 + 2q2 = 7 2q1 + 8q2 + 13(1 q1 q2) =10q1 + 7q2 2(1 q1 q2); 2q1 + 8q2 = 15 q1 = 68/94, q2 = -11/94, (1 q1 q2) = 37/94
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Defenses conditions to prevent exploitation

From 3x3 to 3x2 and recalculate (q2 = 0)

Football Game (2/2)

Defense Run Run 2 Pass 8 Blitz 13 q-Mix 5.83

Short Pass
Offense

5 10
5.83

3 7
7.52

6 -2
5.83

5.35 5.83
5.83

Long Pass
p-Mix

From 3x2 to 2x2 Offenses conditions to prevent exploitation

p1 = 12/23, (1 p1 p2) = 11/23

Defenses conditions to pevent exploitation

q1 = 15/23, (1 q1 q2) = 8/23

Expected payoff: 5.83

42

Coordination Game and Joint Strategy

C

Multiple Pure Strategy N.E.

Confess A

Confess B No -1, 0, -1 0, 0, -1 Confess -1, -1, 0 0, -1, 0 -1, -1, -1 0, -1, -1

No B No -1, 0, 0 -2, -2, -2

Confess No

Schelling point: Clues? Coordination? Fair? Mixed strategy

Prob (each one confesses independently) = 0.293 (approximately 0.3) Prob (no one confesses) > 1/3 (i.e., Prob [(-2, -2, -2)] = (1 0.3)3 (approximately 0.35) Expected payoff = 0.3*(-1) + 0.35*(-2) = -1 Correlated equilibrium; not pure strategy Randomization (e.g., by fortune sticks): Expected payoff = -1/3 (if fair) Incentive compatible (even if unfair); otherwise (-2, -2, -2) Efficient whether it is fair or not Mechanism design for non-cooperative game
43

Joint strategy

Two Gamblers (A & B) and One Police (C)

Gambling: for gamblers (positive value); not caught (2, -1); caught (-1, 2), no gambling (0, 1) C

3 Players
(No Pure Strategy N.E.) Garage

Garage
B Bar 0, 0, 1 2, 2, -1 Garage 2, 2, -1 0, 0, 1 -1, -1, 2 0, 0, 1

Bar
B Bar 0, 0, 1 -1, -1, 2

Garage Bar

Gamblers expected payoff = 1/2*0 + 1/4*(-1) + 1/4*2 = 1/4

Two Gamblers (Coordination) A Garage B Garage 2, 2, -1 Bar 0, 0, 1 2 Gamblers & Police G Garage C Garage -1, -1, 2 Bar 2, 2, -1

Bar

0, 0, 1

2, 2, -1

Bar

2, 2, -1

-1, -1, 2

Gamblers expected payoff = 1/2*(-1) + 1/2*2 = 1/2

44

03/15 Assignment

Ch 7 & 8: Solved questions http://www.wwnorton.com/studyspace/disciplin es/economics.aspx?DiscId=6 Ch 7 & 8: Unsolved questions (optional)

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