Module 4 Lecture 13
Module 4 Lecture 13
Module 4 Lecture 13
Definition 1. Sequential games are strategic situations with a defined order of play.
This game has four players – Ann, Bob, Chris, and Deb – that make their moves in
turns. Ann is the first to move, so she starts the game by choosing her move at the
initial node of the game tree. Nodes of a game tree in which some player has to make
a move are called decision nodes. Ann has two choices available to her at the initial
node: Stop and Go. These choices are illustrated by two branches emerging from the
initial node and labeled “Stop” and “Go”. Ann’s choices at this point will determine
how the game will be played.
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Simultaneous-move games are also applicable to situations in which players are not literally choosing
their actions simultaneously, but rather cannot communicate with each other.
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• If Ann chooses Stop, then the game reaches Bob’s decision node. Bob can choose
between three moves – 1, 2, and 3. If Bob chooses 1, Ann gets to move again. If Bob
chooses 2, Deb gets to move. Finally, if Bob chooses 3, the game is terminated with
the payoff profile (10, 7, 1, 1) realizing for all four players (listed in alphabetical
order). The last nodes in a game tree are called terminal nodes and, whenever the
game play reaches a terminal node, the game is over and the payoffs are realized2 .
• If Ann chooses Go, Chris gets to choose between Risky and Safe. If he chooses
Safe, the game play reaches a terminal node and the payoff profile (3, 5, 3, 1) is
realized. If Chris chooses a Risky strategy, a fair coin is flipped and the outcome
of the game is determined by whether that coin comes up “heads” or “tails”. This
is an example of an external uncertainty featuring in the game. For notational
convenience, we introduce a fictitious player Nature that “decides” whether the
coin will come up “heads” or “tails” each with 50% probability.
Starting from the initial node, you can trace a number of different paths through the
game tree by following successive branches that terminate at a particular terminal node.
We call these paths game paths and they describe a particular possibility of how the
game can play out, or a game play.
Consider again Figure 1. A single move taken by a player at a decision node is called an
action. But sometimes players have more than one decision node – in this case, Ann.
She has to make plans for her choices at each decision node even though this decision
node may never be reached. Let us explicitly state what the strategies are for each of
the players:
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Even though if Ann chooses Go she never gets to move again, we still write down
her strategies as if she would get to move in her second decision node. This pedantic
specification of strategies matters for more advanced game theory topics, such as analysis
of stability of equilibria. People are known to make mistakes when playing games;
similarly, Ann could make a mistake and choose Stop even if she intended to choose Go.
If such a small mistake happens, it is important to follow up how Ann would act in case
Bob chooses 1 and she gets to move again. So we are now ready to formally define what
a strategy is in a sequential game.
Definition 2. A strategy is a complete plan of actions for the game that describes
actions at each of the player’s decision nodes, contingent on all possible combinations
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There is a useful way of thinking about strategies: If you were to delegate your choice
to a computer program, this program should execute completely without returning an
error message. Say, one of the players later in the game makes a mistake that puts you
in a decision node which you have not planned for. The program will return an error
message, so the game will not be able to terminate. Therefore, you must specify your
actions at all decision nodes given all possible combinations of choices made by other
players.
Finally, we will start our analysis of sequential games by considering a special type
of sequential games – games of perfect information. A game is said to have perfect
information if at each decision node a player observes all moves made by other players
earlier in the game. In other words, every player knows the history of the game when it
is their turn to move.
Definition 3. Perfect information is a situation in which all players know the history
of the game at each decision node and face no external uncertainty.
Let us employ rollback or backward induction to solve this game. Start by looking at
Future Carmen’s decision node. She can choose whether to continue smoking and get a
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payoff of 1 or not to continue smoking and get a payoff of -1. Future Carmen maximizes
her payoff by choosing to continue smoking. Today’s Carmen should anticipate this
and make her choice accordingly. If she chooses to Try, then Future Carmen chooses to
Continue and Today’s Carmen gets a payoff of -1. If she chooses not to try smoking, her
payoff will be zero. Therefore, Today’s Carmen maximizes her payoff by choosing not
to try smoking (Not). Therefore, the equilibrium path of play is Not and the rollback
equilibrium is (Not, Continue).
(a) How many pure strategies are available to each player? List all of them.
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(b) Identify the rollback equilibrium outcome and the complete equilibrium strategies
of each player.
Use backward induction to identify that the equilibrium play is S-n-S-n-N and that the
rollback equilibrium is (SSN , nns) yielding the equilibrium payoff of (4, 5).