Nash Equilibrium

Felix Munoz-Garcia School of Economic Sciences

Washington State University

EconS 503
Best Response

Given the previous three problems when we apply dominated

strategies, let’s examine another solution concept:
Using Best responses to …nd Rationalizable strategies, and
Nash equilibria.
Best Response

Best response:
A strategy si is a best response of player i to a strategy pro…le
s i selected by all other players if it provides player i a larger
payo¤ than any of his available strategies si 2 Si .

ui (si , s i ) ui (si , s i ) for all si 2 Si

For two players, s1 is a best response to a strategy s2 selected

by player 2 if

u1 (s1 , s2 ) u1 (s1 , s2 ) for all s1 2 S1

That is, for any s2 that player 2 selects, the utility player 1
obtains from playing s1 is higher than by playing any other of
his available strategies.
Rationalizable strategies

Given the de…nition of a best response for player i, we can

interpret that he will never use a strategy that cannot be
rationalized for any beliefs about his opponents’strategies:
A strategy si 2 Si is never a best response for player i if
there are no beliefs he can sustain about the strategies that his
opponents will select, s i , for which si is a best response.
We can then eliminate strategies that are never a best
response from Si , as they are not rationalizable.
In fact, the only strategies that are rationalizable are those
that survive such iterative deletion, as we de…ne next:
A strategy pro…le (s1 , s2 , ..., sN ) is rationalizable if it survives
the iterative elimination of those strategies that are never a
best response.
Examples, and comparison with IDSDS (see Handout).
Rationalizable Strategies - Example

1 Beauty Contest / Guess the Average [0, 100]

0 25 50 100

1
The guess which is closest to 2 the average wins a prize.
"Level 0"Players !They select a random number from [0, 100],
implying an average of 50.

"Level 1" Players ! BR (s i ) = BR (50) = 25

"Level 2" Players ! BR (s 1 ) = BR (25) = 12.5
... ! 0
Rationalizable Strategies

How many degrees of iteration do subjects use in experimental

settings?
About 1-2 for "regular" people.
So they say si = 50 or si = 25.
But...
One step more for undergrads who took game theory;
One step more for Portfolio managers;
1-2 steps more for Caltech Econ majors;
About 3 more for usual readers of …nancial newspapers
(Expansión in Spain and FT in the UK).
For more details, see Rosemarie Nagel "Unraveling in Guessing
Games: An Experimental Study" (1995). American Economic
Review, pp. 1313-26.
Nash equilibrium

Besides rationalizability, we can use best responses to identify

the Nash equilibria of a game, as we do next.
Nash equilibrium
A strategy pro…le (s1 , s2 , ..., sN ) is a Nash equilibrium if every
player’s strategy is a best response to his opponent’s
strategies, i.e., if

ui (si , s i ) ui (si , s i ) for all si 2 Si and for every player i

For two players, a strategy pair (s1 , s2 ) is a Nash equilibrium if

Player 1’s strategy, s1 , is a best response to player 2’s strategy
s2 ,
u1 (s1 , s2 ) u1 (s1 , s2 ) for all s1 2 S1 =) BR1 (s2 ) = s1
and similarly, player 2’s strategy, s2 , is a best response to
player 1’s strategy s1 ,
u2 (s1 , s2 ) u2 (s1 , s2 ) for all s2 2 S2 =) BR2 (s1 ) = s2
Nash equilibrium

In short, every player must be playing a best response against

his opponent’s strategies, and
Players’conjectures must be correct in equilibrium
Otherwise, players would have incentives to modify their
strategy.
This didn’t need to be true in the de…nition of
Rationalizability, where beliefs could be incorrect.
The Nash equilibrium strategies are stable, since players don’t
have incentives to deviate.
Nash equilibrium

Note:
While we have described the concept of best response and
Nash equilibrium for the case of pure strategies (no
randomizations), our de…nitions and examples can be extended
to mixed strategies too.
We will next go over several examples of pure strategy Nash
equilibria (psNE) and afterwards examine mixed strategy Nash
equilibria (msNE).
Example 1: Prisoner’s Dilemma

Player 2
If Player 2 confesses,
BR1(C )=C Confess Not Confess

Confess -5,-5 0,-15

Player 1
Not Confess -15,0 -1,-1

Let’s start analyzing player 1’s best responses.

If player 2 selects Confess (left column), then player 1’s best
response is to confess as well.
For compactness, we represent this result as BR1 (C ) = C ,
and underline the payo¤ that player 1 would obtain after
selecting his best response in this setting, i.e., 5.
Example 1: Prisoner’s Dilemma

Player 2
If Player 2 does not confess,
BR1(NC )=C Confess Not Confess

Confess -5,-5 0,-15

Player 1
Not Confess -15,0 -1,-1

Let’s continue analyzing player 1’s best responses.

If player 2 selects, instead, Not Confess (right column), then
player 1’s best response is to confess.
For compactness, we represent this result as BR1 (NC ) = C ,
and underline the payo¤ that player 1 would obtain after
selecting his best response in this setting, i.e., 0.
Example 1: Prisoner’s Dilemma

If Player 1 confesses, Player 2

BR2(C )=C
Confess Not Confess

Confess -5,-5 0,-15

Player 1
Not Confess -15,0 -1,-1

Let’s now move to player 2’s best responses.

If player 1 selects Confess (upper row), then player 2’s best
response is to confess.
For compactness, we represent BR2 (C ) = C , and underline
the payo¤ that player 2 would obtain after selecting his best
response in this setting, i.e., 5.
Example 1: Prisoner’s Dilemma

Player 2
If Player 1 does not confess,
BR2(NC )=C Confess Not Confess

Confess -5,-5 0,-15

Player 1
Not Confess -15,0 -1,-1

Finally, if player 1 selects Not Confess (lower row), then player

2’s best response is to confess.
For compactness, we represent BR2 (NC ) = C , and underline
the payo¤ that player 2 would obtain after selecting his best
response in this setting, i.e., 0.
Example 1: Prisoner’s Dilemma
Underlined payo¤s hence represent the payo¤s that players
obtain when playing their best responses.
When we put all underlined payo¤s together in the prisoner’s
dilemma game...
Player 2
Confess Not Confess

Confess -5,-5 0,-15

Player 1
Not Confess -15,0 -1,-1

We see that there is only one cell where the payo¤s of both
player 1 and 2 were underlined.
In this cell, players must be selecting mutual best responses,
implying that this cell is a Nash equilibrium of the game.
Hence, we say that the NE of this game is (Confess, Confess)
with a corresponding equilibrium payo¤ of ( 5, 5).
Example 2: Battle of the Sexes

Recall that this is an example of a coordination game, such as

those describing technology adoption by two …rms.

Wife
Football Opera

Football 3, 1 0, 0
Husband
Opera 0, 0 1, 3

Husband’s best responses:

When his wife selects the Football game, his best response is
to also go to the Football game, i.e., BRH (F ) = F .
When his wife selects Opera, his best response is to also go to
the Opera, i.e., BRH (O ) = O.
Example 2: Battle of the Sexes

Wife
Football Opera

Football 3, 1 0, 0
Husband
Opera 0, 0 1, 3

Wife’s best responses:

When her husband selects the Football game, her best response
is to also go to the Football game, i.e., BRW (F ) = F .
When her husband selects Opera, her best response is to also
go to the Opera, i.e., BRW (O ) = O.
Example 2: Battle of the Sexes

Wife
Football Opera

Football 3, 1 0, 0
Husband
Opera 0, 0 1, 3

Two cells have all payo¤s underlined. These are the two Nash
equilibria of this game:
(Football, Football) with equilibrium payo¤ (3, 1), and
(Opera, Opera) with equilibrium payo¤ (1, 3).
 Prisoner’s Dilemma ! NE = set of strategies surviving
IDSDS
Battle of the Sexes ! NE is a subset of strategies surviving
IDSDS (the entire game).
Therefore, NE has more predictive power than IDSDS.
Great!

IDSDS

(Smaller subsets of equilibria indicate

greater predictive power)

NE
 The NE provides more precise equilibrium predictions:

Nash
equilibrium

IDSDS strategy
profiles
All strategy
profiles

Hence, if a strategy pro…le (s1 , s2 ) is a NE, it must survive IDSDS.

However, if a strategy pro…le (s1 , s2 ) survives IDSDS, it does not
need to be a NE.
Example 3: Pareto coordination

Player 2
Tech A Tech B

Tech A 2, 2 0, 0
Player 1
Tech B 0, 0 1, 1

While we can …nd two NE in this game,(A,A) and (B,B),

there are four strategy pro…les surviving IDSDS
Indeed, since no player has strictly dominated strategies, all
columns and rows survive the application of IDSDS.
Example 3: Pareto coordination

Player 2
Tech A Tech B

Tech A 2, 2 0, 0
Player 1
Tech B 0, 0 1, 1

While two NE can be sustained, (B,B) yields a lower payo¤

than (A,A) for both players.
Equilibrium (B,B) occurs because, once a player chooses B,
his opponent is better o¤ at B than at A.
In other words, they would have to sumultaneously move to A
in order to increase their payo¤s.
Example 3: Pareto coordination

Such a miscoordination into the "bad equilibrium" (B,B) is

more recurrent than we think:
Betamax vs. VHS (where VHS plays the role of the inferior
technology B, and Betamax that of the superior technology
A). Indeed, once all your friends have VHS, your best response
is to buy a VHS as well.
Mac vs. PC (before …les were mostly compatible).
Blu-ray vs. HD-DVD.
Example 4: Anticoordination Game

The game of chicken is an example of an anticoordination

game.

Dean
Swerve Straight

Swerve 0, 0 -1, 1
James
Straight 1, -1 -2, -2

James’best responses:
When Dean selects Swerve, James’best response is to drive
Straight, i.e., BRJ (Swerve ) = Straight.
When Dean selects Straight, James’best response is to
Swerve, i.e., BRJ (Straight ) = Swerve.
Example 4: Anticoordination Game

Dean
Swerve Straight

Swerve 0, 0 -1, 1
James
Straight 1, -1 -2, -2

Dean’s best responses:

When James selects Swerve, Dean’s best response is to drive
Straight, i.e., BRD (Swerve ) = Straight.
When James selects Straight, Dean’s best response is to
Swerve, i.e., BRD (Straight ) = Swerve.
Example 4: Anticoordination Game

Dean
Swerve Straight

Swerve 0, 0 -1, 1
James
Straight 1, -1 -2, -2

Two cells have all payo¤s underlined. These are the two NE
of this game:
(Swerve, Straight) with equilibrium payo¤ (-1,1), and
(Straight, Swerve) with equilibrium payo¤ (1,-1).
Unlike in coordination games, such as the Battle of the Sexes
or technology games, here every player seeks to choose the
opposite strategy of his opponent.
Some Questions about NE:

1 Existence? ! all the games analyzed in this course will have

at least one NE (in pure or mixed strategies)
2 Uniqueness? ! Small predictive power. Later on we will
learn how to restrict the set of NE.
Example 6: Rock-Paper-Scissors
Not all games must have one NE using pure strategies...

Lisa
Rock Paper Scissors

Rock 0, 0 -1, 1 1, -1

Bart Paper 1, -1 0, 0 -1, 1

Scissors -1, 1 1, -1 0, 0

Bart’s best responses:

If Lisa chooses Rock, then Bart’s best response is to choose
Paper, i.e., BRB (Rock ) = Paper .
If Lisa chooses Paper, then Bart’s best response is to choose
Scissors, i.e., BRB (Paper ) = Scissors.
If Lisa chooses Scissors, then Bart’s best response is to choose
Rock, i.e., BRB (Scissors ) = Rock.
Example 6: Rock-Paper-Scissors

Lisa
Rock Paper Scissors

Rock 0, 0 -1, 1 1, -1

Bart Paper 1, -1 0, 0 -1, 1

Scissors -1, 1 1, -1 0, 0

Lisa’s best responses:

If Bart chooses Rock, then Lisa’s best response is to choose
Paper, i.e., BRL (Rock ) = Paper .
If Bart chooses Paper, then Lisa’s best response is to choose
Scissors, i.e., BRL (Paper ) = Scissors.
If Bart chooses Scissors, then Lisa’s best response is to choose
Rock, i.e., BRL (Scissors ) = Rock.
Example 6: Rock-Paper-Scissors

Lisa
Rock Paper Scissors

Rock 0, 0 -1, 1 1, -1

Bart Paper 1, -1 0, 0 -1, 1

Scissors -1, 1 1, -1 0, 0

In this game, there are no NE using pure strategies!

But it will have a NE using mixed strategies (In a couple of
weeks).
Example 7: Game with Many Strategies
Player 2
w x y z

a 0, 1 0, 1 1, 0 3, 2

b 1, 2 2, 2 4, 0 0, 2
Player 1
c 2, 1 0, 1 1, 2 1, 0

d 3, 0 1, 0 1, 1 3,1

Player 1’s best responses:

If Player 2 chooses w, then Player 1’s best response is to
choose d, i.e., BR1 (w ) = d.
If Player 2 chooses x, then Player 1’s best response is to
choose b, i.e., BR1 (x ) = b.
If Player 2 chooses y, then Player 1’s best response is to
choose b, i.e., BR1 (y ) = b.
If Player 2 chooses z, then Player 1’s best response is to
choose a or d, i.e., BR1 (z ) = fa, d g.
Example 7: Game with Many Strategies
Player 2
w x y z

a 0, 1 0, 1 1, 0 3, 2

b 1, 2 2, 2 4, 0 0, 2
Player 1
c 2, 1 0, 1 1, 2 1, 0

d 3, 0 1, 0 1, 1 3,1

Player 2’s best responses:

If Player 1 chooses a, then Player 2’s best response is to
choose z, i.e., BR1 (a) = z.
If Player 1 chooses b, then Player 2’s best response is to
choose w, x or z, i.e., BR1 (b ) = fw , x, z g.
If Player 1 chooses c, then Player 2’s best response is to
choose y, i.e., BR1 (c ) = y .
If Player 1 chooses d, then Player 2’s best response is to
choose y or z, i.e., BR1 (d ) = fy , z g.
Example 7: Game with Many Strategies

Player 2
w x y z

a 0, 1 0, 1 1, 0 3, 2

b 1, 2 2, 2 4, 0 0, 2
Player 1
c 2, 1 0, 1 1, 2 1, 0

d 3, 0 1, 0 1, 1 3,1

NE can be applied very easily to games with many strategies.

In this case, there are 3 seperate NE: (b,x), (a,z) and (d,z).
Two important points:
Note that BR cannot be empty: I might be indi¤erent among
my available strategies, but BR is non-empty.
Players can use weakly dominated strategies, i.e., a or d by
Player 1; x or z by Player 2.
Example 8: The American Idol Fandom

We can also …nd the NE in 3-player games.

Harrington, pp. 101-102.
More generally representing a coordination game between
three individuals or …rms.
"Alicia, Kaitlyn, and Lauren are ecstatic. They’ve just landed
tickets to attend this week’s segment of American Idol. The
three teens have the same favorite among the nine contestants
that remain: Ace Young. They’re determined to take this
opportunity to make a statement. While [text]ing, they come
up with a plan to wear T-shirts that spell out "ACE" in large
letters. Lauren is to wear a T-shirt with a big "A," Kaitlyn
with a "C," and Alicia with an "E." If they pull this stunt o¤,
who knows–they might end up on national television! OMG!
Example 8: The American Idol Fandom

While they all like this idea, each is tempted to wear instead
an attractive new top just purchased from their latest
shopping expedition to Bebe. It’s now an hour before they
have to leave to meet at the studio, and each is at home
trying to decide between the Bebe top and the lettered
T-shirt. What should each wear?"

Alicia chooses E Alicia chooses Bebe

Kaitlyn Kaitlyn
C Bebe C Bebe

A 2, 2, 2 0, 1, 0 A 0, 0, 1 0, 1, 1
Lauren Lauren
Bebe 1, 0, 0 1, 1, 0 Bebe 1, 0, 1 1, 1, 1
Example 8: The American Idol Fandom

Alicia chooses E Alicia chooses Bebe

Kaitlyn Kaitlyn
C Bebe C Bebe

A 2, 2, 2 0, 1, 0 A 0, 0, 1 0, 1, 1
Lauren Lauren
Bebe 1, 0, 0 1, 1, 0 Bebe 1, 0, 1 1, 1, 1

There are 2 psNE: (A,C,E) and (Bebe, Bebe, Bebe)

Example 9: Voting: Sincere or Devious?

Harrington pp. 102-106

Three shareholders (1, 2, 3) must vote for three options (A,
B, C) where
Shareholder 1 controls 25% of the shares
Shareholder 2 controls 35% of the shares
Shareholder 3 controls 40% of the shares
Their preferences are as follows:

Shareholder 1st Choice 2nd Choice 3rd Choice

1 A B C
2 B C A
3 C B A
Example 9: Voting: Sincere or Devious?

3 votes for A
2
A B C
This implies the following
winners, for each possible
A A A A
strategy profile:
1
B A B A

C A A C

3 votes for B
2
A B C

A A B B
1
B B B B

C B B C
Example:
3 votes for C 1 votes B, 2 votes B, 3 votes C:
Votes for B = 25 + 35 = 60%
2
Votes for C = 40%
A B C
B is the Winner
A A C C
1
B C B C

C C C C
Example 9: Voting: Sincere or Devious?

3 votes for A
2
A B C

A 2,0,0 2,0,0 2,0,0

1
B 2,0,0 1,2,1 2,0,0

C 2,0,0 2,0,0 0,1,2

3 votes for B
2
A B C
Each player obtains a payoff of:
A 2,0,0 1,2,1 1,2,1
2 if his most preferred option is adopted
1 1 if his second most preferred option is adopted
B 1,2,1 1,2,1 1,2,1
0 if his least preferred option is adopted

C 1,2,1 1,2,1 0,1,2

3 votes for C
2
A B C

A 2,0,0 0,1,2 0,1,2

1
B 0,1,2 1,2,1 0,1,2

C 0,1,2 0,1,2 0,1,2

Example 9: Voting: Sincere or Devious?

3 votes for A
2
A B C

A 2,0,0 2,0,0 2,0,0

1
B 2,0,0 1,2,1 2,0,0

C 2,0,0 2,0,0 0,1,2

3 votes for B
2
A B C 5 NEs:
(A, A, A)
A 2,0,0 1,2,1 1,2,1
(B, B, B)
1
B 1,2,1 1,2,1 1,2,1
(C, C, C)
(B, B, C)
C 1,2,1 1,2,1 0,1,2 (A, C, C)

3 votes for C
2
A B C

A 2,0,0 0,1,2 0,1,2

1
B 0,1,2 1,2,1 0,1,2

C 0,1,2 0,1,2 0,1,2

A comment on the NEs we just found

First point :Sincere voting cannot be supported as a NE of

the game.
Indeed, for sincere voting to occur, we need that each player
selects his/her most preferred option, i.e., pro…le (A,B,C),
which is not a NE.
Second point: In the symmetric strategy pro…les (A,A,A),
(B,B,B), and (C,C,C), no player is pivotal, since the outcome
of the election does not change if he/she were to vote for a
di¤erent option.
That is, a player’s equilibrium action is weakly dominant.
A comment on the NEs we just found

3 votes for A
2
A B C This result can be easily
visualized by analyzing the
A A A A matrices representing the
1 results of each voting profile.
B A B A
For instance, for (A,A,A),
C A A C option A arises. If only one
player changes his vote,
3 votes for B option A is still the winner.
2
A B C

A A B B A similar argument is
1 applicable to (B,B,B) ...
B B B B

C B B C

3 votes for C
2
A B C

A A C C
1 ... and to (C,C,C).
B C B C

C C C C
A comment on the NEs we just found

Third point: Similarly, in equilibrium (B,B,C), shareholder 3

does not have incentives to deviate to a vote di¤erent than C
since he would not be able to change the outcome.
Similarly for shareholder 1 in equilibrium (A,C,C).
A comment on the NEs we just found

3 votes for A
2
A B C

A A A A
1
B A B A

C A A C

3 votes for B
2
A B C

A A B B
1 In NE (B,B,C), option B is the
B B B B winner.

C B B C
In (B,B,C) a unilateral
3 votes for C deviation of player 3 towards
2 voting for A (in the top
A B C matrix) or for B (in the
middle matrix) still yields
A A C C option B as the winner.
1 Player 3 therefore has no
B C B C incentives to unilaterally
change his vote.
C C C C