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Unit 3.

Game Theory
Introduction to non-cooperative
games

Plan
1. Non-cooperative game Theory
Game concepts: Rules of the Game
Game concepts: Common Knowledge
2 players games

2. Strategic games
Representation
Solution concept
Dominant Strategy
Nash Equilibrium
Pure strategies
Mixed Strategies

3. Extensive Games
Subgame perfect Nash Equilibrium

Learning Objectives

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1. Non-Cooperative Game Theory

A game (dictionary definition) is a
A competitive activity in which players contend with
each other according to a set of rules

Strategic Behavior:
Conscious behavior arising among competitors or
players, in a situation where all are aware of their
conflicting interests and interdependence of their
payoffs.

Non-Cooperative Game theory provides the

tools and techniques to analyze strategic
situations in which decision-makers interact.
A Game is a stylized model that depicts
situations of strategic behavior.
Every game is played by a set of rules which
have to specify four elements

Game Concepts: Rules of the Game

Who is playing: a set of players
What they are playing with- a set of alternative
actions or choices, the strategies, that each player has
available.
strategies (rules telling each player which action to choose
at each point of the game.

When each player gets to play

How much they stand to gain (or lose) from the
choices made in the game.
Payoffs (usually consist of the profit or expected profit the
players receive after the game have been played out)

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Game Concepts: Common Knowledge

We assume that the rules of the game are
Common Knowledge
who, what, when, and how much constitutes the rules
of the game.

That is, If you ask any two players in the game

about the rules of the game they will give you the
same answer.
Every player knows the rules, and knows that
other players knows that he knows the rules,,
ad infinitum.

2 players game
Player 1
(i) knows the rules of the game, and knows that player
2 knows the rules of the game, also
(ii) Knows that player 2 knows that player 1 knows (i),
also
(iii) knows that player 2 knows (ii)

Ad infinitum
This is important because if at some point player 1 knows
that he will never choose some actions (because it is not the
best available), he must know that player 2 knows that too.

Other information structures

Information structure of the game refer to what
players know and when they know it during the
game.
Perfect information: each player knows all the history
of the game before taking any action.
Games where players move simultaneously are games of
imperfect information.

Incomplete information: some players have more

information than others, at the beginning of the game.
Symmetric information: all players have exactly the
same information when each player moves.

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Mathematical representation
Two principal mathematical representations of
a game:
Strategic (strategic) form of a game which
consider situations in which actions are chosen
one and for all.
Extensive form of a game which allows for the
possibility that plan may be revised as they are
carried out. (dynamic games)

Examples

STRATEGIC GAMES

Representation of the game

Player 1 and player 2
Player 1 available actions 1 , 1
Player 2 2 , 2
Payoffs depends on own action and the other
players action.
These games are games of imperfect
information because both players move
simultaneously.

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For any game we need to know what actions will

be chosen by the players?
We also take into account that the best action of any
given player depends, in general, on the other players
actions. The player must form a belief about the other
players actions:
when choosing an action a player must have in mind the
actions the other players will choose.

When we analyze a game we assume that

Each player (rational decision maker) chooses the best
available action, and
Every players belief about other players actions is
correct

Solution concept
A solution concept is a formal rule for predicting
how a game will be played.
Predictions (called "solutions), describe which
strategies will be adopted by players and, therefore, the
result of the game.
Iterated dominance

The most commonly used solution concepts

are equilibrium concepts,
Examples: Nash equilibrium.

In many cases different solution concepts result in

more than one solution.
We may apply a refinement to eliminate implausible
equilibria in richer games.
Example: Backward induction,

Strategic Game: Representation

P2

Players
2

2 (1,2)
1

1 (1,2)

P1

1 (1,2)
2

1 (1,2)

2 (1,2)

2 (1,2)

(1,2)

1 (1,2)

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P2

Players
2

2 (1,2)

Actions

1 (1,2)

P1

1 (1,2)
2

2 (1,2)

2 (1,2)

(1,2)

1 (1,2)

1 (1,2)

P2

Players
2

2 (1,2)

Actions

1 (1,2)

P1

1 (1,2)
2

1
Payoffs

2 (1,2)

2 (1,2)

(1,2)

1 (1,2)

1 (1,2)

Alternatively
P2
1

P1
1

1 (1,2) , 2 (1,2)

1 (1,2) , 2 (1,2)

1 (1,2) , 2 (1,2)

1 (1,2) , 2 (1,2)

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Zero Sum Games

Games in which one players gain is always
matched by another players loss.
Typical example is the matching pennies game
Head

Tail

Head

1, 1

1, 1

Tail

1, 1

1, 1

+ =

Such games are called Strictly Competitive

Sales of Ice Cream

Beginning

Middle

End

50,50

25,75

50, 50

75,25

50,50

75,25

50,50

25,75

50,50

Information Structures
Game of imperfect information
Both players move simultaneously to pick a
location

Game of symmetric information

Both players have the same information when they
play

Also, this is a zero-sum game

Because total sales (100%) will be divided between
the two players any gain for a player is exactly
marched by a loss for the other player.

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We are looking for the solution(s) for this

game
We need to introduce the concepts of
Dominant strategies
Nash Equilibrium
Mini-max strategy

Dominant Strategy
A dominant strategy is a strategy that
outperform any other strategy no matter
what strategy the opponent selects.
Beginning

Middle

End

50,50

25,75

50, 50

75,25

50,50

75,25

50,50

25,75

50,50

Dominant Strategy
A dominant strategy is a strategy that
outperform any other strategy no matter
what strategy the opponent selects.
Beginning

Middle

End

50,50

25,75

50, 50

75,25

50,50

75,25

50,50

25,75

50,50

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Dominant Strategy
A dominant strategy is a strategy that
outperform any other strategy no matter
what strategy the opponent selects.
Beginning

Middle

End

50,50

25,75

50, 50

75,25

75,25

50,50

25,75

50,50

Equilibrium
Each player will play his dominant strategy and
the solution is:
, the payoff attached with this
equilibrium is 50% of the sales for each.

Iterated Dominance
In some games after eliminating a dominated
strategy, one (or more) other strategies
become dominated in their turn.
A rational player will proceed the same way
and eliminate them too.
The process of elimination of dominated
strategies is called iterated dominance.

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Iterated Dominance

Iterated Dominance

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Nash Equilibrium
Definition: A Nash equilibrium is an action
profile with the property that no player can
do better by choosing an action different from
, given that every other player adheres to .
Recall the Ice cream trucks game: the solution
obtained by eliminating strictly dominated
action is also a Nash Equilibrium.
Consider the strategy profile ,
player 1 has no incentive to change and play Beginning
or End given that player 2 chooses Middle.
the same is true for player 2.

Which is not the case for any other action profile.

Consider whether the strategy profile , is a
Nash Equilibrium
Player 1 has incentive to play instead Middle and
increase his market share to 75%. (the same is true for
player 2).
Hence the strategy profile , is not a Nash
equilibrium.

You might do the same with any other possible

strategy profiles in this game. How many are they?

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Matching Pennies Game

Two players each must secretly turn a penny
to heads or tails. The players reveal their
choices simultaneously. If the penny match
player1 keeps both pennies. If not player 2
keeps both.
Head

Tail

Head

+1, 1

1, +1

Tail

1, +1

+1, 1

Matching Pennies Game

Consider {H,H}. Player 1 would like to change
and play T instead of H, if player 2 adhere to H.
Because at least one player can do better by
choosing T, {H,H} is not an equilibrium.
We can check that there is no equilibrium
using the strategies T or H (with certainty).
We say there is no equilibrium in pure
strategies for this game
But Nash Theorem says that there is at least
one equilibrium for any finite game!

Mixed Strategies
A mixed strategy is an assignment of a probability
to each pure strategy.
Since probabilities are continuous, there is an
infinitely many mixed strategies available to each
player.
A player rationally picks the probabilities that
maximize his Expected payoff.
In the marching Pennies game let player 1 plays
Head with probability p, and player 2 plays head
with probability q, then the expected payoffs
functions are the following:

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p
1-p
q

1-q

1 = +1 + 1 1 + 1
1 + 1 +1
After simplifications
1 = 2 1 + 1 + 2 1
= 2 1 2 1
Provided an interior solution exists, expected profit is maximized if
1
1
= 2 2 1 = 0, =

p
1-p
q

1-q

2 = 1 + 1 1 + 1
+1 + 1 1
After simplifications
2 = 2 1 2 1
Provided an interior solution exists, expected profit is maximized if
2
1
= 2 2 1 = 0, =

p
1-p
q

Notice that the expected profit for player 1, if player 2 plays the
mixed strategy q = , is

1-q

1 = 2 1 2 1 = 0, for any value of p. Hence the

2
value of p is irrelevant: whether player 1 uses H or T all the time or
any of the two randomly (at any p different from ) his expected
payoff will not be different, as long as the opponent uses a mixed
strategy q=1/2.
The same is true for player 2, if player 1 plays the mixed strategy p =
, his expected payoff will be always 2 = 2 1
1
2 1 = 0, for any value of q.
2

This is a characteristic of optimal mixed strategies.

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p
1-p
q

1-q

(intuitively) optimal mixed strategy makes your

opponents selection of a strategy irrelevant to its
outcome.
We can use this intuition to solve for a mixed
strategy without using calculus:
Player 1: the optimal strategy is the one (p) that
result in equal payoff for player 2 whether heplays
always H or T
+ 1 = 1
1 2 = 2 1
2 = 4, = 1/2

Similarly, we can prove that the optimal mixed

strategy for player 2 is q=1/2.
1 1

It is clear that strategy , = (2 , 2) is a

Nash Equilibrium since no player can improve
on the outcome by playing a different strategy.
Notice that a pure strategy is a special case of
mixed strategies (as it is a degenerate mixed
strategy (attaching a probability 1 to one of
the available strategies).

Any equilibrium using a combination of

strategies in some proportion is called a
mixed strategy Nash Equilibrium.
A mixed strategy Nash Equilibrium is unstable
because payoffs are the same regardless of the
strategy adopted by the players, so they have
little incentives to maintain the equilibrium.

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Ice Cream Trucks Game again

Another concept of solution for Zero-Sum
games is the mini-max strategy: each player
chooses the strategy that minimizes the
maximum possible outcome for other player.

Prisoners Dilemma Games

Two suspects in a major crime are held in separate cells.
(players)
There is no enough evidence to convict either of them unless one of them acts as an
informer against the other.
Players: two suspects
Actions: Each players set of actions is {Quiet, Fink}
Preferences : Suspect 1s ordering from best to

This a game of imperfect information because both suspects move

simultaneously.
It is also a static game (because both suspects move simultaneously)

Prisoners Dilemma
Solution:
1. Check whether there is a dominant strategy

Fink is a dominant strategy for Suspect 1(no

matter what strategy suspect 2 adopts) because
3>2 and 1>0. Likewise, Fink is a dominant
strategy for suspect 2.

The equilibrium is {Fink, Fink} and the payoffs

(1,1).

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We can check that the strategy profile {Quiet,

Quiet} is not a Nash Equilibrium.

(because at least one of the suspects may improve on the payoff of 2 by playing (another strategy, i.e. Fink)

Upon checking the payoff matrix it is clear

that if both suspects cooperate (i.e. choose
{Quiet, Quiet}), they will be both better of
than with the no-cooperation outcome .

Prisoners Dilemma and Coordination

Upon checking the payoff matrix it is clear
that if both suspects cooperate (i.e. choose
{Quiet, Quiet}), they will be both better of
than with the no-cooperation outcome .

Read the Press

This game has been used to model the
problem of deployment of taxi cab over the
territory of Grand Tunis.
Le problme du service de taxis
individuels dans le Grand-Tunis - Les
jaunes...partout et nulle part (Premire partie)
La Presse de Tunisie April 18, 2013.

http://www.lapresse.tn/05022015/65903/le-probleme-du-service-de-taxis-individuels-dans-le-grandtunis.html

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EXTENSIVE GAMES

Many games are sequential, in which player 1 moves,

then player 2 respond, then player 1 respond to player
2s responseThese games are dynamic (as opposed
to static).
They are represented by game trees.
The tree is defined by nodes and branches.
Nodes represent places where something happens in the
game (such as a decision by one of the players), and
branches indicate the various actions that players can
choose.
We represent nodes by solid circles and branches by
arrows connecting the nodes.

A properly constructed tree is called an extensive-form

representation

Example: Price competition

Perfect information

Find Nash Equilibria.

The rule look ahead and reason back.

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Player 2 optimal strategy

(L,L) because 2>1 and >0

Player 1 figure that out so if he plays H he

earn 0, and if he plays L he earns million,
hence he plays L
The (unique) Nash Equilibrium is (L,(L,L))

Imperfect information
The two firms typically select their prices
simultaneously and independently.
Neither firms observes the others move before
making its choice.

Example: Entry Game

CREDIBLE THREATSSUBGAME
PERFECT NE

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Summary
Game theory is the study of how interdependent
decision makers make choices.
A game must include players, actions, information,
strategies, payoffs, outcomes, and equilibria.
In simple zero-sum games, the mini-max strategy
is a dominant solution to the game.
At least one Nash Equilibrium (in pure or
random strategies) exists for all finite games.
Games comes with different information
structures:
Perfect Information (every player knows the history of
play before taking any action)

In games with complete information, nature does

not move first, or natures move is observed by all
players.
In games of certain information, nature never
moves after another player moves.
In games of symmetric information, all players have
exactly the same information when each moves.

A dominant solution to the classical prisoners

dilemma game results in a non-optimal
solution for the players.

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