Combination of Simultaneous and Sequential

Games

Abdul Quadir
XLRI

27 December, 2019
Reading: Dixit and Skeath, Chapter 6and 9.
Introduction

I There are many games where you will have both sequentiality
and simultaneity.
I We can also analyze any sequential game without resorting to
game tree.
I Any sequential game can be converted into simultaneous
moves game.
I Both the solution concepts Nash equilibrium and backward
induction equilibrium will be used.
I Backward induction equilibrium is a refinement of Nash
equilibrium when we have multiple equilibria.
Two Stage Games
I Many games have simultaneous and sequential games both
together.
I Consider the following game:
I Consider two potential telecom firms, firm X and firm Y .
I They would like to invest 10 billion rupees in purchasing
fibre-optic.
I They make their investment decision simultaneously.
I If neither choose to invest, the game ends.
I If one invest and other does not, then the investor will make
its pricing decision.
I It can choose either high price attracting 60 million customers
and makes 400 rupees as operating profit from each customer.
I Or it can choose low price attracting 80 million customers
and makes 200 rupees as operating profit from each customer.
Two Stage Games
I Many games have simultaneous and sequential games both
together.
I Consider the following game:
I Consider two potential telecom firms, firm X and firm Y .
I They would like to invest 10 billion rupees in purchasing
fibre-optic.
I They make their investment decision simultaneously.
I If neither choose to invest, the game ends.
I If one invest and other does not, then the investor will make
its pricing decision.
I It can choose either high price attracting 60 million customers
and makes 400 rupees as operating profit from each customer.
I Or it can choose low price attracting 80 million customers
and makes 200 rupees as operating profit from each customer.
Two Stage Game

I If both purchase the fibre-optic and enter in the market, then

their pricing decisions become the second simultaneous-move
game.
I Each can choose either low price or high price.
I If both choose either low price or high price, they split the
market equally.
I If one chooses low price and other chooses high price, then
the low price firm will get all the 80 million customers.
I The interaction of firms X and Y forms a two-stage game.
I The first simultaneous game defines four combinations and
three of them moves to a second stage game.
I Let us depict it on a graph
Two-Stage Game
Second stage: Y’s pricing
High
14
Don’t Invest
Y
Don’t 0,0 0,
6
Invest ,0 Low

Second stage:X’s pricing

High 14
Second stage: pricing game
X
6 High Low
Low High 2,2 -10,6
Low 6,-10 -2,-2
Solution of Second Stage Game
Second stage: Y’s pricing
High
14
Don’t Invest
Y
Don’t 0,0 0,
6
Invest ,0 Low

Second stage:X’s pricing

High 14
Second stage: pricing game
X
6 High Low
Low High 2,2 -10,6
Low 6,-10 -2,-2
Solution of First Stage Game

Don’t Invest
Don’t 0,0 0,14
Invest 14,0 -2,-2

I There are two pure strategy Nash equilibria (Don’t, Invest)

and (Invest, Don’t).
   
1 7 1 7
I The mixed strategy Nash equilibrium is ,
8 8 , ,
8 8 .
I Since second stage has a unique Nash equilibrium, we do not
have any problem.
I What if second stage has multiple equilibria, which one we
pick?
I For which we need a procedure.
Solution of First Stage Game

Don’t Invest
Don’t 0,0 0,14
Invest 14,0 -2,-2

I There are two pure strategy Nash equilibria (Don’t, Invest)

and (Invest, Don’t).
   
1 7 1 7
I The mixed strategy Nash equilibrium is ,
8 8 , ,
8 8 .
I Since second stage has a unique Nash equilibrium, we do not
have any problem.
I What if second stage has multiple equilibria, which one we
pick?
I For which we need a procedure.
Solution of First Stage Game

Don’t Invest
Don’t 0,0 0,14
Invest 14,0 -2,-2

I There are two pure strategy Nash equilibria (Don’t, Invest)

and (Invest, Don’t).
   
1 7 1 7
I The mixed strategy Nash equilibrium is ,
8 8 , ,
8 8 .
I Since second stage has a unique Nash equilibrium, we do not
have any problem.
I What if second stage has multiple equilibria, which one we
pick?
I For which we need a procedure.
Solution of First Stage Game

Don’t Invest
Don’t 0,0 0,14
Invest 14,0 -2,-2

I There are two pure strategy Nash equilibria (Don’t, Invest)

and (Invest, Don’t).
   
1 7 1 7
I The mixed strategy Nash equilibrium is ,
8 8 , ,
8 8 .
I Since second stage has a unique Nash equilibrium, we do not
have any problem.
I What if second stage has multiple equilibria, which one we
pick?
I For which we need a procedure.
Subgames

I A part of the game of extensive form game is itself a game.

I We call such games subgames of the extensive form game.
I More generally, a subgame is the part of a multimove game
that begins at a particular node of the original game.
I A multimove game has as many subgames as it has decision
nodes.
Subgames
How many subgames are there in the following tree games?

Contri. 3,3,3
3
Contribute
2 Don’t 3,3,4

Contribute Contri.
3 3,4,3
Don’t
1 Don’t 1,2,2

Contri. 4,3,3
3
Contribute
Don’t 2 Don’t 2,1,2

Contri. 2,2,1
3
Don’t
Don’t 2,2,2
Multistage Games

I It could be the case that in one stage game we have

sequential game and in other stage game we have
simultaneous-move game.
I Lets consider a modified version of the above game.
I Suppose one of the firms, say firm X has already invested 10
billion rupees in the fibre-optic network.
I Now firm Y wants to decide invest or not knowing the firm X
has already invested.
I If firm Y does not invest, then X has a simple pricing decision.
I If firm Y invests, then they have simultaneous-move pricing
game.
I Depict this game on a tree.
Game Tree

High Low
High 2,2 -10,6
Invest Low 6,-10 -2,-2

High 0,14
Don’t X

Low 0,6
Strategic Moves

I In equilibrium, Y will not invest and X will fix high price.

I In this case every firm will try to be the first to invest and
reap all the benefits.
I In this type of games players will try to manipulate the rules
of the games in their favour.
I Thus, there should be some agency or institution to enforce
this.
I Devices that players use to manipulate the game is known as
strategic moves.
I Three types of strategic moves are very common:
commitments, threats, promises.
I Their success depends on the credibility of these devices.
I Thus, using them comes with a warning.
Strategic Moves

I Use of strategic moves depends on the order of the moves.

I What is the meaning of “move first”.
I It depends on two thinks:
I observability
I irreversibility
I Strategic moves could be conditional and unconditional.
I Unconditional strategic moves means that order of the moves
does not matter.
I For instance, if player A says: “In the game to follow, I will
make a particular move X ”.
I This strategic move is known as commitment.
I Note that this type of commitment is beneficial if Player A
either moves in second stage or plays a simultaneous-move
game.
Contribution Game
Contri. 3,3,3
3
Contribute
2 Don’t 3,3,4

Contri. 3,4,3
3
Don’t
1 Don’t 1,2,2

Contri. 4,3,3
3
Contribute
Don’t Don’t 2,1,2

Contri. 2,2,1
3
Don’t
Don’t 2,2,2
Contribution Game

I In equilibrium Player 1 does not contribute and enjoys first

mover advantage.
I Player 2 or Player 3 can get benefited if they can show that
they are not in a position to contribute.
I For instance, suppose Player 3 could let it known that she has
sunk all of her savings into a large house-renovation project.
I She does not have anything to contribute to the street garden.
I Thus, Player 3 commits not to contribute irrespective what
Player 2 and Player 1 do.
I Thus, she has changed the rule of the game and hence as if
she has become first-mover.
I Check that rollback equilibrium entails Player 1 and Player 2
both contributing.
Conditional Strategic Moves
I If Player A declares: “In the game to follow, I will respond to
your choice in the following way. If you choose Y1 , I will play
Z1 ; if you play Y2 , I will play Z2 ,. . . ”.
I This type of move is called response rule.
I This type of strategic move implies that Player A move in the
second stage.
I This type of strategic moves can be in two modes: You want
to deter the other player not play an action to increase your
payoff.
I Or you want to induce the other player to play an action to
increase your payoff.
I To pursue these two aims, we use the following strategic
moves: if A declares
I “Unless your action (or inaction) conforms to my stated wish, i
will respond in a way that will hurt you”. (threat).
I If your action (or inaction) conforms to my stated wish, I will
respond in a way that will reward you. (promise).
Conditional Strategic Moves
I If Player A declares: “In the game to follow, I will respond to
your choice in the following way. If you choose Y1 , I will play
Z1 ; if you play Y2 , I will play Z2 ,. . . ”.
I This type of move is called response rule.
I This type of strategic move implies that Player A move in the
second stage.
I This type of strategic moves can be in two modes: You want
to deter the other player not play an action to increase your
payoff.
I Or you want to induce the other player to play an action to
increase your payoff.
I To pursue these two aims, we use the following strategic
moves: if A declares
I “Unless your action (or inaction) conforms to my stated wish, i
will respond in a way that will hurt you”. (threat).
I If your action (or inaction) conforms to my stated wish, I will
respond in a way that will reward you. (promise).
Conditional Strategic Moves
I If Player A declares: “In the game to follow, I will respond to
your choice in the following way. If you choose Y1 , I will play
Z1 ; if you play Y2 , I will play Z2 ,. . . ”.
I This type of move is called response rule.
I This type of strategic move implies that Player A move in the
second stage.
I This type of strategic moves can be in two modes: You want
to deter the other player not play an action to increase your
payoff.
I Or you want to induce the other player to play an action to
increase your payoff.
I To pursue these two aims, we use the following strategic
moves: if A declares
I “Unless your action (or inaction) conforms to my stated wish, i
will respond in a way that will hurt you”. (threat).
I If your action (or inaction) conforms to my stated wish, I will
respond in a way that will reward you. (promise).
Conditional Strategic Moves
I If Player A declares: “In the game to follow, I will respond to
your choice in the following way. If you choose Y1 , I will play
Z1 ; if you play Y2 , I will play Z2 ,. . . ”.
I This type of move is called response rule.
I This type of strategic move implies that Player A move in the
second stage.
I This type of strategic moves can be in two modes: You want
to deter the other player not play an action to increase your
payoff.
I Or you want to induce the other player to play an action to
increase your payoff.
I To pursue these two aims, we use the following strategic
moves: if A declares
I “Unless your action (or inaction) conforms to my stated wish, i
will respond in a way that will hurt you”. (threat).
I If your action (or inaction) conforms to my stated wish, I will
respond in a way that will reward you. (promise).
Dinner Game

I A child is having dinner with her parents.

I Child can have vegetable or desert.
I Parents want her to take vegetable first then dinner.
I The child prefers to have desert more than vegetable.
I Parents prefer that she would eat both.
I What is the rollback equilibrium?
I How can parents achieve their desirable outcome?
Dinner Game

I A child is having dinner with her parents.

I Child can have vegetable or desert.
I Parents want her to take vegetable first then dinner.
I The child prefers to have desert more than vegetable.
I Parents prefer that she would eat both.
I What is the rollback equilibrium?
I How can parents achieve their desirable outcome?
Credibility of Strategic Moves

I When can you be sure that the strategic moves are credible?
I If strategic moves affect only the payoffs of other player not
the player exercising strategic moves, then they cannot be
credible.
I For instance, if the threat does not affect the payoffs of the
player who issues threat, then the threat will not be credible.
I For instance, in the dinner game if the parents are sadist, then
the child will get the dessert anyway.
I Therefore, the child will not heed for the threat.
I Threat will be a credible strategic move if it does impose
some cost on the threatener (mutual harm).
I Similarly for promises and commitments, there are costs for
both the players.
Credibility of Strategic Moves

I When can you be sure that the strategic moves are credible?
I If strategic moves affect only the payoffs of other player not
the player exercising strategic moves, then they cannot be
credible.
I For instance, if the threat does not affect the payoffs of the
player who issues threat, then the threat will not be credible.
I For instance, in the dinner game if the parents are sadist, then
the child will get the dessert anyway.
I Therefore, the child will not heed for the threat.
I Threat will be a credible strategic move if it does impose
some cost on the threatener (mutual harm).
I Similarly for promises and commitments, there are costs for
both the players.
Game of Chicken and Commitment
I This is a slightly different kind of coordination game.
I Here, the players want to avoid choosing the actions with the
same labels.
I This game was being played among American teenagers in
1950s.
I Two teenagers take theirs to the opposite ends of main street.
I They have two actions to take: go straight or swerve.
I If one swerves and other goes straight, then the player who
swerves is the “chicken”.
I If both goes straight, then their is collision (worst outcome).
I The game matrix is given as
Swerve Straight
Swerve 0,0 -1,1
Tough 1,-1 -2,-2
Game of Chicken and Commitment
I This is a slightly different kind of coordination game.
I Here, the players want to avoid choosing the actions with the
same labels.
I This game was being played among American teenagers in
1950s.
I Two teenagers take theirs to the opposite ends of main street.
I They have two actions to take: go straight or swerve.
I If one swerves and other goes straight, then the player who
swerves is the “chicken”.
I If both goes straight, then their is collision (worst outcome).
I The game matrix is given as
Swerve Straight
Swerve 0,0 -1,1
Tough 1,-1 -2,-2
Chicken Game and Commitment

I The players can make strategic moves in the simultaneous

move game by first making a commitment in the first stage
and plays simultaneous game in the second stage.
I Suppose Player 1 has the opportunity to make a strategic
move.
I Then he will think whether to commit in the first stage or not.
I Then in the second stage he plays the simultaneous move
game.
I Depict this in a game tree.
Chicken Game and Commitment
He commits to play only straight:

Swerve Straight
Swerve 0,0 -1,1
Uncommitted
Straight 1,-1 -2,-2

Player 1

Committed Swerve Straight

Straight 1,-1 -2,-2

Therefore, Player 1 finds it optimal to make the commitment

because commitment ensures his best payoff.
Chicken Game and Commitment
He commits to play only straight:

Swerve Straight
Swerve 0,0 -1,1
Uncommitted
Straight 1,-1 -2,-2

Player 1

Committed Swerve Straight

Straight 1,-1 -2,-2

Therefore, Player 1 finds it optimal to make the commitment

because commitment ensures his best payoff.
Chicken Game and Commitment
He commits to play only straight:

Swerve Straight
Swerve 0,0 -1,1
Uncommitted
Straight 1,-1 -2,-2

Player 1

Committed Swerve Straight

Straight 1,-1 -2,-2

Therefore, Player 1 finds it optimal to make the commitment

because commitment ensures his best payoff.
Chicken Game and Commitment

I How can Player 1 make the commitment credible?

I Thus, Player 1’ commitment move must be
I irreversible
I visible to other player.
I There are many amusing ideas how to make Player 1’s
commitment visible.
I Remove the steering wheel.
I Ties the steering wheel (but know could not be credible).
I Another plausible idea is Player 1 can make a general
reputation for toughness if this game played is more often.
I Thus, Player 1 can alter his payoff of swerving by subtracting
an amount that represents the loss of the reputation.
I Depict this version of game
Chicken Game and Commitment

I How can Player 1 make the commitment credible?

I Thus, Player 1’ commitment move must be
I irreversible
I visible to other player.
I There are many amusing ideas how to make Player 1’s
commitment visible.
I Remove the steering wheel.
I Ties the steering wheel (but know could not be credible).
I Another plausible idea is Player 1 can make a general
reputation for toughness if this game played is more often.
I Thus, Player 1 can alter his payoff of swerving by subtracting
an amount that represents the loss of the reputation.
I Depict this version of game
Chicken Game and Commitment

I How can Player 1 make the commitment credible?

I Thus, Player 1’ commitment move must be
I irreversible
I visible to other player.
I There are many amusing ideas how to make Player 1’s
commitment visible.
I Remove the steering wheel.
I Ties the steering wheel (but know could not be credible).
I Another plausible idea is Player 1 can make a general
reputation for toughness if this game played is more often.
I Thus, Player 1 can alter his payoff of swerving by subtracting
an amount that represents the loss of the reputation.
I Depict this version of game
Commitment by Changing Payoffs

Swerve Straight
Swerve 0,0 -1,1
Uncommitted
Straight 1,-1 -2,-2

Player 1

Committed Swerve Straight

Swerve -3,0 -4,1
Straight 1,-1 -2,-2

Now see straight is an optimal action for Player 1. In fact it has

become a dominant strategy.
Commitment by Changing Payoffs

Swerve Straight
Swerve 0,0 -1,1
Uncommitted
Straight 1,-1 -2,-2

Player 1

Committed Swerve Straight

Swerve -3,0 -4,1
Straight 1,-1 -2,-2

Now see straight is an optimal action for Player 1. In fact it has

become a dominant strategy.
Remarks

I Both can play the game of commitment.

I The success will depend on
I how fast can you seize on the first move
I on the credibility of that move.
I Note that one player has the advantage in making of
commitment, but the other player can defeat the first player’s
attempt to do so.
I For instance, the other player can disconnect any
communication to the first player.
Deadline Enforcement Game

I Teacher wants to enforce a deadline for the assignment.

I Teacher can be tough or weak in enforcing his deadline.
I Students’ work can be punctual or late.
I The teacher does not like to be tough and his preference is
given as:
I (Weak, Punctual)(Tough, Punctual)(Weak,
Late)(Tough, Weak).
I Students preferences are:
I (Weak, Late)(Weak, Punctual)(Tough,
Punctual)(Tough, Weak).
Punctual Late
Weak 4,3 2,4
Tough 3,2 1,1
Deadline Enforcement Game

I Teacher wants to enforce a deadline for the assignment.

I Teacher can be tough or weak in enforcing his deadline.
I Students’ work can be punctual or late.
I The teacher does not like to be tough and his preference is
given as:
I (Weak, Punctual)(Tough, Punctual)(Weak,
Late)(Tough, Weak).
I Students preferences are:
I (Weak, Late)(Weak, Punctual)(Tough,
Punctual)(Tough, Weak).
Punctual Late
Weak 4,3 2,4
Tough 3,2 1,1
Deadline Enforcement Game

I Teacher wants to enforce a deadline for the assignment.

I Teacher can be tough or weak in enforcing his deadline.
I Students’ work can be punctual or late.
I The teacher does not like to be tough and his preference is
given as:
I (Weak, Punctual)(Tough, Punctual)(Weak,
Late)(Tough, Weak).
I Students preferences are:
I (Weak, Late)(Weak, Punctual)(Tough,
Punctual)(Tough, Weak).
Punctual Late
Weak 4,3 2,4
Tough 3,2 1,1