Perspectives in Mathematics: Notes on

Game Theory, part 3

Homework Write a page on one of the problems/questions mentioned in these notes
(or something else similar that you have come across in your reading.) Due: Wed Sept
30 in class.
If you have had to miss a class, please write two pages. (that way you will get 2
points)
Network problems are very important if you a traffic engineer for a road system or
for the internet....
f:1

Braesss paradox Here we have a network of 4 roads in (I) on the left of Fig 0.0.1 ,
with an added road in (II) of the right.
Think of this as a game with many players (the number of drivers) each trying to
minimize the time they take.
C
x=100

C
45

x=100
B

A
45

x=100
D

45
0

45

B
x=100

(II)s

(I)

Figure 0.0.1. Network for Braesss paradox. Each road is labelled

with time in minutes that it takes to traverse it, where x is the number
of cars.
Suppose there are 4000 cars in all.
Consider situation (I). If x cars go from A to B via C the time takes is x/100 + 45,
which is the same as the time it would take going via D. Therefore both roads (one
through C and one through D), are equivalent. The time taken would be least if
the cars divide themselves equally between the roads. So the average time taken is
2000
100 + 45 = 65. This is a Nash equilibrium, in the sense that if the cars divide equally
no single car could do better by choosing the other route. Note also that when the
total number of cars is 4000 there is no other Nash Equilibrium: if x < 2000 cars go
via C, then it takes longer to go via D, and any single car going through D could take
less time by switching to C.
Now suppose that a wide road is built from C to D, so wide that it takes time 0 to
go from C to D. Then any car arriving at C from A would be better off going via D
(at the worst it would take 4000
100 = 40 < 45 mins) rather than going directly along CB.
Similarly any car at A would be better off going to C first, rather than to D. Thus
1

f:1

the Nash equilibrium is for all cars to go from A to C to D to B, with a journey that
takes 80 mins. (which is worse than before!)
This analysis does depend on the total amount of traffic.
Note: Apparently there was a situation somewhat like this in Seoul, and the authorities
managed to speed up traffic overall by closing a wide overpass in the middle of the city
to cars.
Theory of auctions There are two kinds of Sealed bid auction. In a First Price
action, players submit their bids to buy an object; these bids are opened. The payer
who makes the highest bid gets the object and pays the price he bid. In a Second
Price action, players submit their bids to buy an object; these bids are opened. The
payer who makes the highest bid gets the object and pays NOT the price he bid, but
the next highest price.
The second procedure seems counterintuitive. But it leads to a TRUTHFUL auction,
i.e. one in which the best strategy is to bid your true value. (This is NOT the best
strategy in a sealed bid first price auction; cf. discussion of winners curse) Here we
are thinking of a situation/game in which there are repeated independent auctions of a
similar nature (e.g. this is how ad slots on Google are sold), so people need to develop
strategies that pay off in the long term.
Note also that the second price auction is much the same as the usual open auction
(an English auction) with an auctioneer. Here the auctioneer raises the price until
only one person is left bidding. That person gets the object, but pays essentially (i.e.
just a little above) what the second highest bidder offered. In these terms the first
price auction is a like a Dutch auction (e.g. for tulip bulbs) in which the auctioneer
starts with a very high price, gradually lowers it and sells the object to the first person
who bids.
Suppose we have lots of players Ai bidding for some object that they value at vi , but
their bid is bi (presumably vi ). The next result shows what is meant by a truthful
auction.
Theorem: In a sealed bid second price auction, it is a dominant strategy for each
player to choose bi = vi .
To see this, we need to show that if all other players play as before, player i cannot
do better by playing something other than bi = vi . The payoff to player i is

0
if he/she does not get it
Pi =
vi bj if he/she gets it and bj is the next highest bid.
Suppose you as player i bid b0i > vi . If you dont win with b0i then you wouldnt win
with betting vi and payoff is zero in both cases. If you win with b0i and if you bet vi
then your payoff Pi remains the same. So suppose you win with b0i but do not win
if you bet vi . Then the second bid bj vi . If bj = vi then your new payoff is zero.
And it was zero before, because even if you won, the payoff was vi bj = 0. So again,
no change. On the other hand if bj > vi then your payoff when you win with b0i is

NEGATIVE, while before you would have had payoff 0 (because youd wouldnt have
gotten the object.) So this is strictly worse!
So now suppose you as player i bid b0i < bi = vi . Then you have less chance of
winning, and if you do win, your payoff is the same as before. So again this strategy is
strictly worse.
Chapter 9 discusses many other aspects of auctions. e.g. what is the best strategy
in a sealed bid, first price auction?
Questions
1. Look at the network (II) for Braesss paradox and find Nash equilibria when there
are 4500, 5000, 6000, 7000 cars. How does the total time taken by all cars (a measure
of social value) compare with that for network (I)? What do you notice? Are there
situations when network (II) is better?
2. re auctions: there are many interesting questions on p 242. Here is one:
How does the number of bidders in a second price sealed bid auction affect how much
the seller can expect to receive? Say there are two bidders with independent private
values vi for the object that are either 1 or 3, with probability 21 in each case. If there
is a tie at bid x for the highest bid, then the winner is selected at random and pays x.
(a) Show that the sellers expected revenue is 46 .
(b) What happens if in this situation there are three bidders (again each with vi = 1
or 3 with probability 12 .)
(c) Briefly explain why the change in the number of bidders affects the sellers expected revenue.
5. Question 3 on p 242 is a similar, slightly more elaborate version of this. Question 6
asks what happens if there is collusion in a sealed bid, second price auction. Do one of
these questions.