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Instructor: Songzi Du
compiled by Shih En Lu
Simon Fraser University
February 3, 2015
Lecture 5
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Perfect Information
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Backward Induction
Idea: should require that players play a best-response (given what
they know) at all nodes, even those that are not reached.
Strategy profiles satisfying the above are called subgame-perfect
(Nash) equilibria (SPE or SPNE) in games of complete information.
In perfect information games, solving for SPEs is particularly easy:
just start at the terminal nodes to infer what players will do at the
last step. Given that, figure out what happens at the second-to-last
step, and so on.
This procedure is called backward induction.
When is there a unique SPE in perfect information games?
Is every SPE a NE?
Is every NE a SPE?
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Exercise
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2b
2
By backward induction, instead of taking as given a constant q2 , Firm
1 will take as given Firm 2s above best response: Firm 1 knows that
q2 now depends on q1 .
Firm 1s profit function:
q1 (a b(q1 + q2 ) c)
ac
q1
= q1 (a b(q1 +
) c)
2b
2
1
2
=
((a c)q1 bq1 )
2
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ac
2b
ac
4b
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ac
3b
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1 (a c)2
1 (a c)2
, 2 =
8
b
16
b
1 (a c)2
9
b
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Centipede Game
Player 1 and 2 are in a partnership: the opportunities are the
money lying on the table. Assume that in the first round, there
are two piles (one for each player): a pile of $4, and a pile of $1.
Player 1 has two options in the first round, either to stop (and
grab a pile of money), or to continue the partnership. If he stops,
the game ends and he gets $4 while Player 2 gets the remaining
$1. If he continues, the game moves to the second round: the
two piles are doubled (to $8 and $2), and Player 2 face with a
similar decision: stop (the game ends, Player 2 gets $8, and
Player 1 gets $2), or continue (the piles double again, and Player
1 decide at round 3). The game continues for n rounds.
Assume that n = 4. Draw the game tree. Find the SPE by backward
induction.
How many strategies does Player 1 have? Player 2?
ECON 302 (SFU)
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Ultimatum game
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