Академический Документы
Профессиональный Документы
Культура Документы
for Managers
GAME
THEORY:
NASH
EQUILIBRIUM
1
Topics
• solution
concept #2:
Nash
equilibrium
Strictly
dominant
ads 60, 20 30, 30
strategy
for A
2
Not all Games have Strictly Dominant
Strategies for All Players
A & B are competitors. Each chooses their price to be LO, MED, or HI,
and profits (payoffs in the table) are based on the pair of prices chosen.
B’s Pricing Strategies
LO MED HI
LO 6, 6 8, 5 10, 4
A’s Pricing
Strategies
MED 5, 8 9, 9 11, 7
HI 4, 10 7, 11 10, 10
A’s optimal price varies based on B’s pricing choice. Same for B. So, neither
has a strictly dominant pricing strategy. Instead, the choice for each will be
influenced by their “beliefs” about what the other will do. Is there a solution
concept that we can use to predict outcome of these kinds of games??
Nash Equilibrium
A Nash equilibrium is a set of strategies, one for each player, with the property that
each player’s strategy is a best response to what is proposed for the other players.
Firm B
B’s Pricing Strategies
No
Ads
Ads LO MED HI
A’s Pricing Strategies
No
50,50 20,60
Firm A
3
Nash Equilibrium
The Nash equilibrium is a set of strategies, one for each
player, with the property that each player’s strategy is a
best response to what is proposed for the other players.
LO MED HI LO MED HI
20 20 20 40
These locations mean 40 sales for A and 60 for B. Is this pair of locations a NE?
No, consider A. Given B’s location, A prefers to relocate just to the left of B, which
means 60 sales for A and 40 for B.
60 40
Is this a NE? No, B would relocate just to the left of A for a payoff of 60, leaving 40 for A.
60 40
Is this a NE? No, A prefers to relocate just to left of B for a payoff of 59, leaving 41 for B.
SO, WHAT IS THE NASH EQUILIBRIUM TO THE LOCATION GAME?
4
Example 6: Location Game
The NE has A positioned at customer 50 and B positioned at customer 51, so that A sells to
the 50 customers numbered 1 to 50 and B sells to the 50 customers numbered 51 to 100.
This is a NE because, from this position, neither vendor has an incentive to relocate.
50 50
The NE of this game provides insights into why gas stations are often positioned next to each
other. It also offer an explanation for why political candidates move to the political center.
Finally, notice that the average sunbather is not well served by this NE. Think about
customers #1, #2, …., #50 who buy from vendor A. Customer #1 travels a distance of 49 to
get to A, customer #2 travels a distance of 48, and customer #N travels a distance of 50-N. It
is the same for vendor B’s customers. The average distance travelled by the 100 sunbathers
is about 25.
Suppose instead that A was positioned at 25 and B was positioned at 75. Then A would still
have sunbathers 1-50 and B would have 51-100. But the average distance travelled by the
100 sunbathers would be only 12½. This pair of locations is not a NE, though.
Summary
• NE is a pair of strategies with the property that the
strategy for each player is a best response to what is
proposed for the other player, i.e., the strategies are
mutual best responses.
• Sometimes the NE is viewed positively by all, but not
always. For example, the NE of a Prisoner’s Dilemma
game is strictly worse for both parties than a feasible
alternative.
• And in our Location Game, customers were not well
served by the NE
• Despite these issues, we should be cautious
predicting an outcome that is not a NE, because then
we’re predicting one or both parties to do something
that is not actually in their best interest.
5
Resolving the Prisoners’ Dilemma
1) Repeated Interaction
Retailer B
high price low
Retailer B
high price low
6
Meet-the-Competition Clause
EXAMPLES:
Meet-the-Competition Clause
7
Resolving the Prisoner’s Dilemma: Tying One’s Hands
Recall advertising game with NE of (ads, ads) and NE payoff of (30,30)
What happens with an industry ban on advertising?
This happened with cigarette advertising in the 1960s, and there is
some evidence that it improved industry profits….at least for awhile.
So everyone “tying one’s hands” sometimes helps!
Firm B
no ads ads
Player 2
1 finger 2 fingers
1 finger -1, 1 1, -1
Player 1
2 fingers 1, -1 -1, 1
8
GAME
THEORY:
Sequential
Games
Topics
• solution concept #3:
Subgame Perfect Nash
equilibrium, a
refinement of the Nash
equilibrium for
sequential games,
developed by Reinhard
Selten, co-winner of
1994 Nobel Prize in
By Tohma (talk) - Own work, GFDL,
Economics.
https://commons.wikimedia.org/w/index.php?curid=1277868
9
SEQUENTIAL GAME of MARKET ENTRY
POTENTIAL ENTRANT Incumbent, Entrant
Don’t Enter Stay out
prepare & 100,20
share if
100,20 200,0
there’s entry Incumbent
INCUMBENT
Invest in
70,-10 130,0
capacity &
start a price
70,-10
war in there’s Potential
200,0
entry Entrant
Strategic Form Game with NE
of (share, enter) for (100,20) Incumbent
130,0
The Sequential Game is explicit
about the sequence of Incumbent, Entrant
decisions, which leads to two 100,20
versions of the Sequential Game Potential
Entrant
Our approach to solving
sequential games is Backward 200,0
Induction: start at the end of the 70,-10
game and work to the front
solving for rational choices Incumbent
(based on an assumption of Potential
subsequent rational choices). Entrant 130,0
10
Entry-Deterrence Strategies
“Excess”: extra level chosen because of the threat of entry.
Q: What is the 5, 6
equilibrium payoff? 20, 2
A: A
18, 20
11
Backward Induction Solution is SUBGAME PERFECT NASH EQUILIBRIUM
A, B
A chooses IN, for a 10, 12
payoff of 10
B chooses RIGHT, A
for a payoff of 14
10,12 5, 18
B
5, 13
A chooses UP, for a
7,14
payoff of 7 A
A chooses OUT, for a
payoff of 7 7,14 7, 14
There are 3 ways to 7, 14
A chooses OUT, for a
ask & answer about payoff of 15
the equilibrium of A
A
this game. 7,14 15, 2
B 15,2
Version 2 6, 5
6,5
B chooses MIDDLE, A
Q: What is the for a payoff of 5
equilibrium path? 6,5 5, 6
A chooses IN, for a
payoff of 6
20, 2
A: A goes UP, B A
goes RIGHT, and A
goes OUT A chooses IN, for a
payoff of 20
20,2 18, 20
10,12 5, 18
A chooses UP, for a
B
payoff of 7
5, 13
Version 3 7,14
A
Q: What is the
A chooses OUT, for a
7,14
7, 14
payoff of 7
SPNE?
A chooses OUT, for a
7, 14
A: - A chooses UP payoff of 15
A
- B chooses RIGHT A 7,14
if A chose UP and 15, 2
B 15,2
MIDDLE if A chose 6, 5
DOWN. 6,5
- A chooses IN if A & B for
chooses MIDDLE, A
a payoff of 5
B chose UP & LEFT, 5, 6
6,5
OUT if A & B chose
A chooses IN, for a
UP & RIGHT, OUT if payoff of 6
20, 2
A & B chose DOWN A
& LEFT, and IN A chooses IN, for a
otherwise. payoff of 20
20,2 18, 20
12
SEQUENTIAL GAME of MARKET ENTRY
AMAZON, APPLE
-0.5, 0.8
APPLE
0.5, 0.6
AMAZON
0, 1.2
APPLE
-0.5, 0.8
APPLE
0.5, 1.0
AMAZON
0, 2
13