GAME THEORY 101: THE COMPLETE TEXTBOOK

WILLIAM SPANIEL

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 Game Theory 101: The Complete Textbook

Lesson 1.1: The Prisoner’s Dilemma and

Strict Dominance
The prisoner’s dilemma is the oldest and most
studied model in game theory, and its solution concept
is also the simplest. As such, we will start with it.
Two thieves plan to rob an electronics store. As
they approach the backdoor, the police arrest them for
trespassing. The cops suspect that the pair planned to
break in but lack the evidence to support such an
accusation. They therefore require a confession to
charge the suspects with the greater crime.
Having studied game theory in college, the
interrogator throws them into the prisoner’s dilemma.
He privately sequesters both robbers and tells them the
following:
We are currently charging you with trespassing,
which calls for a one month jail sentence. I know you
were planning on robbing the store, but right now I
cannot prove it—I need your testimony. In exchange for
your cooperation, I will dismiss your trespassing charge,
and your partner will be charged to the fullest extent of
the law: a twelve month jail sentence.
I am offering your partner the same deal. If both of
you confess, your individual testimony is no longer as
valuable, and your jail sentence will be eight months
each.
If both criminals are self-interested and only care
about minimizing their jail time, should they take the
interrogator’s deal?

1.1.1: Solving the Prisoner’s Dilemma

The story contains a lot of information. Luckily, we
can condense everything we need to know into a simple
matrix:
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We will use this type of game matrix regularly, so it

is important to understand how to interpret it. There
are two players in this game. The first player’s strategies
(“keep quiet” and “confess”) are in the rows, and the
second player’s strategies are in the columns. The first
player’s payoffs are listed first for each outcome, and
the second player’s are listed second. For example, if
the first player keeps quiet and the second player
confesses, then the game ends in the top right set of
payoffs, where the first player receives twelve months
of jail time and the second player receives zero. Finally,
as a matter of convention, we refer to the first player as
a man and the second player as a woman; this will allow
us to utilize pronouns like “he” and “she” instead of
endlessly repeating “player 1” and “player 2.”
Which strategy should each player choose? To see
the answer, we must look at each move in isolation.
Consider the game from player 1’s perspective. Suppose
he knew player 2 will keep quiet. How should he
respond?
Let’s focus on the important information in that
context. Since player 1 is only thinking about his time in
jail, we can block out player 2’s payoffs with question
marks:

Now we see that player 1 should confess. If he

keeps quiet, he will spend one month in jail. But if he
confesses, he walks away. Since he prefers less jail time
to more jail time, he should confess in this situation.
 Game Theory 101: The Complete Textbook

Note that player 2’s payoffs are completely

irrelevant to player 1’s decision in this context—if he
knows that she will keep quiet, then he only needs to
look at his own payoffs to decide which strategy to pick.
Thus, the question marks could be any number at all,
and player 1’s optimal decision given player 2’s move
will remain the same.
On the other hand, suppose player 1 knew that
player 2 will confess. What should he do? Again, the
answer is easier to see if we only look at the relevant
information:

Confession wins a second time: confessing leads to

eight months of jail time, whereas silence buys twelve.
So player 1 would want to confess if player 2 confesses.
Putting these two pieces of information together,
we reach an important conclusion—player 1 is better
off confessing regardless of which strategy player 2
chooses! Thus, player 1 can effectively ignore whatever
he thinks player 2 will do, since confessing gives him
less jail time in either scenario.
Let’s switch over to player 2’s perspective. Suppose
she knew that player 1 will keep quiet, even though we
realize he should not. Here is her situation:

As before, player 2 should confess, as she will shave

a month off her jail sentence if she does so.
Finally, suppose she knew player 1 will confess.
How should she respond?
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Unsurprisingly, she should confess and spend four

fewer months in jail.
Once more, player 2 is better off confessing
regardless of what player 1 does. Thus, we have
reached a solution: both players confess, and both
players spend eight months in jail. The justice system
has triumphed, thanks to the interrogator’s savviness.
This outcome perplexes a lot of people new to the
field of game theory. Compare the <keep quiet, keep
quiet> outcome to the <confess, confess> outcome:

Looking at the game matrix, people see that the

<keep quiet, keep quiet> outcome leaves both players
better off than the <confess, confess> outcome. They
then wonder why the players cannot coordinate on the
mutually preferable outcome. But as we just saw, any
promise to keep quiet is unsustainable. Player 1 wants
player 2 to keep quiet so when he confesses he walks
away free. The same goes for player 2. As a result, the
<keep quiet, keep quiet> outcome is inherently
unstable. Ultimately, the players end up in the inferior
(but sustainable) <confess, confess> outcome.

1.1.2: The Meaning of the Numbers

Although there is a large branch of game theory
devoted to the study of expected utility, we generally
consider each player’s payoffs as a ranking of his most
preferred outcome to his least preferred outcome. In
the prisoner’s dilemma, we assumed that players only
wanted to minimize their jail time. Game theory does
 Game Theory 101: The Complete Textbook

not force players to have these preferences, as critics

frequently claim. Instead, game theory analyzes what
should happen given what players desire. So if players
only want to minimize jail time, we could use the
negative number of months spent in jail as their
payoffs. This preserves their individual orderings over
outcomes, as the most preferred outcome is worth 0,
the least preferred outcome is -12, and everything else
logically follows in between.
Interestingly, the cardinal values of the numbers are
irrelevant to the outcome of the prisoner’s dilemma.
For example, suppose we changed the payoff matrix to
this:

Here, we have replaced the months of jail time with

an ordering of most to least preferred outcomes, with 4
representing a player’s most preferred outcome and 1
representing a player’s least preferred outcome. In
other words, player 1 would most like to reach the
<confess, keep quiet> outcome, then the <keep quiet,
keep quiet> outcome, then the <confess, confess>
outcome, then the <keep quiet, confess> outcome.
Even with these changes, confess is still always
better than keep quiet. To see this, suppose player 2
kept quiet:

Player 1 should confess, since 4 is better than 3.

Likewise, suppose player 2 confessed:
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Then player 1 should still confess, as 2 is better than

1.
The same is true for player 2. First, suppose player 1
kept quiet:

Player 2 ought to confess, since 4 is greater than 3.

Alternatively, if player 1 confessed:

Player 2 should confess as well, as 2 is greater than

1. Thus, regardless of what the other player does, each
player’s best strategy is to confess.
To be clear, this preference ordering exclusively
over time spent in jail is just one way the players may
interpret the situation. Suppose you and a friend were
actually arrested and the interrogator offered you a
similar deal. The results here do not generally tell you
what to do in that situation, unless you and your friend
only cared about jail time. Perhaps your friendship is
strong, and both of you value it more than avoiding jail
time. Since confessing might destroy friendship, you
could prefer to keep quiet if your partner kept quiet,
which changes the ranking of your outcomes. Your
preferences here are perfectly rational. However, we do
not yet have the tools to solve the corresponding game.
We will reconsider these alternative sets of preferences
in lesson 1.3.
Nevertheless, for the given payoffs, we have seen
an example of strict dominance. We say that a strategy
 Game Theory 101: The Complete Textbook

X strictly dominates strategy Y for a player if strategy X

provides a greater payoff for that player than strategy Y
regardless of what the other players do. In this example,
confess strictly dominated keep quiet for both players.
Unsurprisingly, players never optimally select strictly
dominated strategies—by definition, another strategy is
always a better option regardless of what the other
players do.

1.1.3: Applications of the Prisoner’s Dilemma

The prisoner’s dilemma has a number of
applications. Let’s use the game to explore optimal
strategies in a number of different contexts.
First, consider two states considering whether to go
to war. The military technology available to these
countries gives the side that strikes first a large
advantage in the fighting. In fact, the first-strike benefit
is so great that each country would prefer attacking the
other state even if its rival plays a peaceful strategy.
However, because war destroys property and kills
people, both prefer remaining at peace to
simultaneously declaring war.
Using these preferences, we can draw up the
following matrix:

From this, we can see that the states most prefer

attacking while the other one plays defensively. (This is
due to the first-strike advantage.) Their next best
outcome is to maintain the peace through mutual
defensive strategies. After that, they prefer declaring
war simultaneously. Each state’s worst outcome is to
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choose defense while the other side acts as the

aggressor.
We do not need to solve this game—we already
have! This is the same game from the previous section,
except we have exchanged the labels “keep quiet” with
“defend” and “confess” with “attack.” Thus, we know
that both states attack in this situation even though
they both prefer the <defend, defend> outcome. The
first-strike advantages trap the states in a prisoner’s
dilemma that leads to war.
A similar problem exists with arms races. Imagine
states must simultaneously choose whether to develop
a new military technology. Constructing weapons is
expensive but provides greater security against rival
states. We can draw up another matrix for this scenario:

Here, the states most prefer building while the

other state passes. Following that, they prefer the
<pass, pass> outcome to the <build, build> outcome;
the states maintain the same relative military strength
in both these outcomes, but they do not waste money
on weaponry if they both pass. The worst possible
outcome is for the other side to build while the original
side passes. Again, we already know the solution to this
game. Both sides engage in the arms race and build.
Now consider international trade. Many countries
place tariffs (a tax) on imported goods to protect
domestic industries even though this leads to higher
prices overall.
We can use the prisoner’s dilemma to explain this
phenomenon. A country can levy a tariff against
another country’s goods or opt for no taxes. The best
 Game Theory 101: The Complete Textbook

outcome for a country is to tax imports while not having

the other country tax its exports. This allows the
domestic industries to have an advantage at home and
be competitive abroad, and the country also earns
revenue from the tax itself. Free trade is the next best
outcome, as it allows the lowest prices for each
country’s consumers. Mutual tariffs is the next best
outcome, as they give each country an advantage at
home but a disadvantage abroad; ultimately, this leads
to higher prices than the free trade outcome. The worst
possible outcome is to levy no taxes while the other
country enforces a tariff, as domestic industries stand
no chance against foreign rivals.
Let’s toss that information into another matrix:

We know this is a prisoner’s dilemma and both

sides will tariff each other’s goods.
Finally, consider two rival firms considering whether
to advertise their products. Would the firms ever want
the government to pass a law forbidding
advertisement? Surprisingly, if advertising campaigns
only persuade a consumer to by a certain brand of
product rather than the product in general, the answer
is yes. If one side places ads and the other does not, the
firm with the advertising campaign cuts into the other’s
share of the market. If they both advertise, the ads
cancel each other out, but they still have to pay for the
campaigns.
If we look at the corresponding matrix, we see
another classic example of the prisoner’s dilemma:
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Thus, both sides advertise to preempt the other

side’s campaign. The ads ultimately cancel each other
out, and the firms end the game in a worse position
than had they both not placed ads.
The Public Health Cigarette Smoking Act is a
noteworthy application of the advertising game. In
1970, Richard Nixon signed the law, which removed
cigarette ads from television. Tobacco companies
actually benefited from this law in a perverse way—the
law forced them to cooperating with each other. In
terms of the game matrix, the law pushed them from
the <2, 2> payoff to the mutually preferable <3, 3>
payoff. The law simultaneously satisfied politicians, as it
made targeting children more difficult for all tobacco
companies.
These examples illustrate game theory’s ability to
draw parallels between seemingly dissimilar situations.
We have seen models of prisoner confession, wars,
arms races, taxation, and advertisements. Despite the
range of examples, each had an underlying prisoner’s
dilemma mechanism. In this manner, game theory
allows us to unify a wide-range of life decisions under a
single, unified framework.

1.1.4: Deadlock
We can solve many games beyond the prisoner’s
dilemma using strict dominance alone. Take this game,
for example:
 Game Theory 101: The Complete Textbook

Here, up strictly dominates down for player 1 and

left strictly dominates right for player 2. We can verify
this using the same process as before. First, suppose
player 2 chooses left:

We see that up is better than down, as 3 is greater

than 1.
Repeating this for right, we focus on the following:

Once more, up is better than down, since 4 is

greater than 2. So up is a better strategy than down
regardless of what player 2 does.
Switching gears, suppose player 1 selected up. Then
player 2 can focus on the following contingency:

Left is better than right in this case, as 3 is greater

than 1.
Repeating this process a final time, player 2 now
assumes player 1 will play down:

Left is still better than right, as 2 is greater than 1.

Since left always beats right regardless of what player 1
does, left strictly dominates right, and therefore player
2 will play left. Thus, the outcome is <up, left>.
The technical name for this game is “deadlock”;
both players are locked into their strictly dominant
strategy and will never achieve their best outcome
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unless the other makes a mistake. However, unlike in

the prisoner’s dilemma, no alternative outcome exists
that is simultaneously better for both players than the
<up, left> solution. As such, this game is more intuitive
but substantively less interesting.

1.1.5: Strict Dominance in Asymmetric Games

We can use strict dominance on games even when
they are not as symmetric as the prisoner’s dilemma or
deadlock. Consider this one:

Unlike before, each player has a distinct set of

payoffs. But if we run through the same process as
before, we will see that <up, right> is the only
reasonable solution.
Let’s begin with player 1’s choices. Suppose player 2
moved left. How should player 1 respond?

If he chooses up, he earns 9; if he picks down, he

earns 8. Since 9 is greater than 8, player 1 should play
up in response to left.
Now suppose player 2 chose right. Again, we need
to find how player 1 should optimally respond.
 Game Theory 101: The Complete Textbook

Up nets player 1 a payoff of 3, while down earns

him -1. Since 3 is greater than -1, up is the better
response to right. Thus, player 1 should play up
regardless of player 2’s strategy.
We know player 1’s optimal strategy. All we need to
do is repeat this process for player 2, and we will be
done. Let’s start with how player 2 should respond to
up:

If player 2 chooses left, she earns -2; if she plays

right, she earns 0. Since 0 is greater than -2, she should
pick right in response to up.
Let’s switch to player 2’s response to down:

If player 2 selects left, she earns 5; if she chooses

right, she earns 6. Since 6 is greater than 5, she should
play right in response to down. Thus, regardless of
player 1’s choice, player 2 should optimally select right.
Therefore, the solution to this game is <up, right>.
Player 1 ultimately earns 3, while player 2 earns 0.

Conclusion
Overall, strict dominance is a powerful tool in game
theory. But while the concept is simple, applying it can
be difficult. Even in matrix form, a game still has a lot of
information. To successfully find dominated strategies,
we must focus on one player’s payoffs at a time. Above,
we used question marks to isolate the relevant payoffs.
When searching for strictly dominated strategies on
your own, mentally block out the irrelevant payoffs and
strategies in a similar manner.