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02F Slides11

The document summarizes lectures on repeated games. It covers: 1. Forward induction and examples of its application. 2. Finitely repeated games with observable actions, including entry deterrence games and repeated prisoners' dilemmas. 3. Infinitely repeated games with observable actions, including the folk theorem and its application to repeated prisoners' dilemmas and Cournot oligopoly.

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45 views17 pages

02F Slides11

The document summarizes lectures on repeated games. It covers: 1. Forward induction and examples of its application. 2. Finitely repeated games with observable actions, including entry deterrence games and repeated prisoners' dilemmas. 3. Infinitely repeated games with observable actions, including the folk theorem and its application to repeated prisoners' dilemmas and Cournot oligopoly.

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gd3000
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lectures 10 -11

Repeated Games

14.12 Game Theory


Muhamet Yildiz

Road Map
1.

Forward Induction Examples

2. Finitely Repeated Games with observable actions


1. Entry-Deterrence/Chain-store paradox
2. Repeated Prisoners Dilemma
3. A general result
4. When there are multiple equilibria

3. Infinitely repeated games with observable actions


1.
2.
3.
4.
5.

Discounting / Present value


Examples
The Folk Theorem
Repeated Prisoners Dilemma, revisited tit for tat
Repeated Cournot oligopoly

4. Infinitely repeated games with unobservable actions

Forward Induction
Strong belief in rationality: At any history
of the game, each agent is assumed to be
rational if possible. (That is, if there are two
strategies s and s of a player i that are
consistent with a history of play, and if s is
strictly dominated but s is not, at this
history no player j believes that i plays s.)

Burning Money
0

B
3,1

S
.1,.1

S .1,.1

1,3

S -.9,.1

BB

BS

SB

SS

3,1

3,1

.1,.1

.1,.1

.1,.1

1,3

1,3

DB 2,1

-.9,.1

2,1

-.9,.1

DS -.9,.1

0,3

-.9,.1 0,3

O T

B
2,1

S
-.9,.1
0,3

0B
0S

.1,.1

Repeated Games

Entry deterrence
1
X

Enter

2 Acc.

(1,1)

Fight
(0,2)

(-1,-1)

Entry deterrence, repeated twice,


many times
1
X
(1,3)

Acc.

2 Enter

Fight
(-1,1)

(0,4)

Enter

2 Acc.

Fight

1
X

2 Acc.

Enter

Fight

(1,3)
(0,0)
Enter 2 Acc.

(2,2)

(0,0)

Fight
(-2,-2)

(-1,1)

What would happen if repeated n times?

Prisoners Dilemma, repeated twice,


many times
Two dates T = {0,1};
At each date the prisoners dilemma is played:

C 5,5

0,6

D 6,0

1,1

At the beginning of 1 players observe the strategies at 0.


Payoffs= sum of stage payoffs.

Twice-repeated PD
1

D
2

C
1

C
10
10

1
D
2

1
D

D C

D C

5
11

6
6

0
12

5
11

D C
11
5

6
6

D
2

2
D

1
7

C
11
5

D C

6
6

12
0

7
1

6
6

1
7

2
2

7
1

What would happen if T = {0,1,2,,n}?

A general result
G = stage game = a finite game
T = {0,1,,n}
At each t in T, G is played, and players remember
which actions taken before t;
Payoffs = Sum of payoffs in the stage game.
Call this game G(T).
Theorem: If G has a unique subgame-perfect
equilibrium s*, G(T) has a unique subgameperfect equilibrium, in which s* is played at each
stage.

With multiple equilibria


T = {0,1}
2

M2

1,1

5,0

0,0

M1

0,5

4,4

0,0

0,0

0,0

3,3

s* =
At t = 0, each i play Mi;
At t = 1, play (B,R) if (M1,M2)
at t = 0, play (T,L) otherwise.

M2

2,2

6,1

1,1

M1

1,6

7,7

1,1

1,1

1,1

4,4

Infinitely repeated Games with


observable actions
T = {0,1,2,,t,}
G = stage game = a finite game
At each t in T, G is played, and players
remember which actions taken before t;
Payoffs = Discounted sum of payoffs in the
stage game.
Call this game G(T).

Definitions
The Present Value of a given payoff stream =
(0,1,,t,) is
PV(;) = t=1 tt = 0 + 1 + + tt +
The Average Value of a given payoff stream is
(1)PV(;) = (1)t=1 tt
The Present Value of a given payoff stream at t is
PVt(;) = s=t s-t s = t + t+1 + + st+s +

Infinite-period entry deterrence


1
X
(0,2)

Enter

2 Acc.
Fight
(-1,-1)

(1,1)

Strategy of Entrant:
Enter iff
Accomodated before.
Strategy of Incumbent:
Accommodate iff
accomodated before.

Incumbent:
V(Acc.) = VA = 1/(1);
V(Fight) = VF = 2/(1);
Case 1: Accommodated before.

Entrant:
Accommodated
Enter => 1+VAE
X => 0 +VAE

Not Acc.

Fight => -1 + VA
Acc. => 1 + VA.

Enter =>-1+VFE
X => 0 +VFE

Case 2: Not Accommodated


Fight => -1 + VF
Acc. => 1 + VA
Fight -1 + VF 1 + VA
VF VA = 1/(1) 2/
2/3.

Infinitely-repeated PD
C

C 5,5

0,6

D 6,0

1,1

A Grimm Strategy:
Defect iff someone
defected before.

VD = 1/(1);
VC = 5/(1) = 5VD;
Defected before (easy)
Not defected
D =>
C =>
C

Tit for Tat

Start with C; thereafter, play what the other


player played in the previous round.
Is (Tit-for-tat,Tit-for-tat) a SPE?

Modified: There are two modes:


1. Cooperation, when play C, and
2. Punishment, when play D.

Start in Cooperation; if any player plays D in


Cooperation mode, then switch to Punishment
mode for one period and switch back to the
Cooperation period next.

Folk Theorem
Definition: A payoff vector v = (v1,v2,,vn) is feasible
iff v is a convex combination of some pure-strategy
payoff-vectors, i.e.,
v = p1u(a1) + p2u(a2) ++ pku(ak),
where p1 + p2 ++ pk = 1, and u(aj) is the payoff
vector at strategy profile aj of the stage game.
Theorem: Let x = (x1,x2,,xn) be s feasible payoff
vector, and e = (e1,e2,,en) be a payoff vector at
some equilibrium of the stage game such that xi > ei
for each i. Then, there exist < 1 and a strategy
profile s such that s yields x as the expected
average-payoff vector and is a SPE whenever > .

Folk Theorem in PD
C

C 5,5

0,6

D 6,0

1,1

A SPE with PV
(1.1,1.1)?
With PV (1.1,5)?
With PV (6,0)?
With PV (5.9,0.1)?

Infinitely-repeated
Cournot oligopoly
N firms, MC = 0; P = max{1-Q,0};
Strategy: Each is to produce q = 1/(2n); if any
firm defects produce q = 1/(1+n) forever.
VC =
VD =
V(D|C) =
Equilibrium

10

1
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
0.55
0.5

20

40

60

80

200

400

600

800

100

1
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
0.55
0.5

1000

11

IRCD (n=2)
Strategy: Each firm is to produce q*; if any one
deviates, each produce 1/(n+1) thereafter.
VC = q*(1-2q*)/(1-);
VD = 1/(9(1-));

2
VD|C = max q(1-q*-q) +VD = (1 q *) / 4 +
9(1 )
Equilibrium iff
2
q * (1 2q *) (1 )(1 q *) / 4 + / 9

q*

9 5
3(9 )

x = , y = (3-5/3 )/(9- )

0.4
0.3

0.2
0.1
0
0

0.2

0.4

0.6

0.8

12

Carrot and Stick


Produce at the beginning; at ant t > 0, produce if both
produced or both produced x at t-1; otherwise, produce
x.
Two Phase: Cartel & Punishment
VC = 1/8(1-). Vx = x(1-2x) + VC.
VD|C = max q(1-1/4-q) + VX = (3/8)2 + VX
VD|x = max q(1-x-q) + VX = (1-x)2/4 + VX
VC VD|C VC (3/8)2 + 2VC + x(1-2x)
(1-2) VC - (3/8)2 x(1-2x) (1+)/8 - (3/8)2 x(1-2x)
VX VD|C (1-)Vx (1-x)2/4 (1-)(x(1-2x) + /8(1-)) (1-x)2/4
(1-)x(1-2x) + /8 (1-x)2/4
2x2 x + 1/8 9/64 0
(9/4-2)x2 (3-2)x +/8(1-) 0

Incomplete information

13

Incomplete information
We have incomplete (or asymmetric)
information if one player knows something
(relevant) that some other player does not
know.

An Example
Firm

W ork

H ire
Shirk

H igh p
D o not
hire

N ature

Low 1-p

(1, 2)

H ire

(0, 0)
W

W ork
Shirk

D o not
hire

(0, 1)

(1, 1)

(-1, 2)

(0, 0)

14

The same example


Work

(1, 2)

Shirk

(0, 1)

W
Nature

High p

Hire

hire

Firm

Work

Low
1-p

(1, 1)

W
Shirk

Do not

(-1, 2)

(0, 0)

Another Example Buy

(p, 2-p)

B
Seller

Dont

High 0.5

Buy

Nature

Low .5

What would you ask


if you were to choose
p from [0,4]?

Dont

Buy

(0, 0)
(p,2-p)

(0, 0)
(p, 1-p)

p
Dont
p

(0,0)

Buy

(p, 1-p)

Dont

(0, 0)

15

Same Another Example


Buy

(p, 2-p)

B
High 0.5
Dont

Nature

Buy

Low .5

Seller
Nature High 0.5

What would you ask


if you were to choose
p from [0,4]?

Dont

Buy
Dont

Low .5

(0, 0)
(p,2-p)

(0, 0)
(p, 1-p)

(0,0)

Buy

(p, 1-p)

Dont

(0, 0)

Bayes Rule
Prob(A and B)
Prob(A|B) =
Prob(B)
Prob(A and B) = Prob(A|B)Prob(B) = Prob(B|A)Prob(A)

Prob(B|A)Prob(A)
Prob(A|B) =
Prob(B)

16

Example
Work

p
Success
1-p

Prob(Work|Success) =
p/[p + (1)(1-p)]
Prob(Work|Failure) =
(1-)p/[(1p) + (1)p]

1-p
Shirk
1

Failure

P(W|S)

0.9
0.8

P(w|S),P(W|F)

0.7
0.6
0.5

P(W|F)

0.4
0.3
0.2
0.1
0

0.2

0.4

0.6

0.8

17

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