Game Theory - Lecture 2

Catarina Reis

September 7, 2015

Course plan
September 11 - Problem Set 1

September 14 - Quiz 1

September 25 - Problem Set 2

September 28 - Quiz 2

October 12 - Problem Set 3

Static games of complete information

Normal form representation species:

1. Players of the game
2. Strategies available to each player
3. Payo for each player for each combination of strategies chosen by all
players
For games with two players and a nite number of strategies game can be
represented in a matrix

Dominant and dominated strategies

A strategy si is dominant for player i if it yields a strictly higher payo
than all other possible strategies in his strategy space for every possible
combination of strategies chosen by other players

A strategy si is strictly dominated for player i if it yields a strictly lower

payo than some other strategy in his strategy space for every possible
combination of strategies chosen by other players

A strategy si is weakly dominated for player i if it yields a weakly lower

payo than some other strategy in his strategy space for every possible
combination of strategies chosen by other players, and a strictly higher
payo for at least one of the other players strategies

Rational players always play dominant strategies and never play strictly
dominated strategies (they may choose weakly dominated strategies)
Iterated Elimination of Strictly Dominated Strategies (IESDS) requires not
only rationality, but also common knowledge of rationality

Pure strategies Nash equilibrium

In a static game of complete information with N players, the strategy prole

(s1; ; :::; sn) is a Nash Equilibrium in pure strategies if, for every player i, si is
player is best response to the strategy of the n 1 other players
ui(s1; :::; si ; :::; sn)

ui(s1; :::; s0i; :::; sn) for every s0i 2 Si

Mixed strategies Nash equilibrium

A mixed strategy for player i is a probability distribution pi = (pi1; :::; piK ),

P
where 0 pik 1 for k = 1; :::; K and K
k=1 pik = 1
In an n-player game, the strategies proles (p1; :::; pn) are a Nash Equilibrium
in mixed strategies if, for every player i, pi is player is best response to the
strategy of the n-1 other players
vi(p1; :::; pi ; :::; pn)

for every p0i available to i

vi(p1; :::; p0i; :::; pn)

Mixed strategies NE with two players

In a two player normal form game, the mixed strategies (p1; p2) are a Nash
Equilibrium if each players mixed strategy is the best response to the other
players mixed strategy
v1(p1; p2)
v2(p1; p2)
with vi(p1; p2)

v1(p1; p2) for any p1

v2(p1; p2) for any p2
PJ PK
j=1 k=1 p1j p2k ui(s1j ; s2k )

Implication 1: every strategy that is played with a positive probability must

lead to the same utility
Implication 2: strategies that are played with a positive probability cannot lead
to lower utility than those which are not

Properties of Nash equilibria

Existence of Nash Equilibrium: in a normal form game, if the number of
players is nite, and the strategy space is nite, then there exists at least
one Nash Equilibrium, possibly involving mixed strategies.

Generically, nite normal form games have an odd number of equilibria

If IESDS eliminates all but strategies (s1; :::; sn), then these strategies are
the unique Nash Equilibrium (NE) of the game

If strategies (s1; :::; sn) are a NE, then they survive IESDS