Introduction

Review
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ECON 673
Information, Game Theory, and Market Design
Lecture 2

David A. Ovadia
University of Maryland

1 February 2024

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Review
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Section 1

Introduction

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Recording of lectures

Please note that this lecture is being recorded (audio and video)

By joining today’s class session, you consent to being recorded

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A Beautiful Mind failed to illustrate a NE

In the clip from the movie, Nash recognizes that all four guys
will leave the bar alone if they all try their luck
with the sole blonde woman

Instead, Nash proposes that each of four guys picks a brunette

Question: why isn’t this proposal a Nash equilibrium?

(Hint: think about the “no regrets” interpretation of NE)

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Pulse check

How were the podcast lectures?

Any other questions or concerns?

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Previous lecture

Static games of complete information

Discussion of games
Formal definition of a static game
Solution concepts
Preliminary considerations
Iterated elimination of strictly dominated strategies
Nash equilibria

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Previous podcasts

IESDS & Nash equilibria

Iterated elimination of strictly dominated strategies
Practice
Weakly dominated strategies
Nash equilibria
The underline method
Nash equilibria and IESDS

Application: duopoly competition

Cournot model
Graphical equilibrium derivation
Bertrand model

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Lecture outline

Review
Solution concepts
Duopoly competition and collusion
Discussion
Collusion
Mixed strategies
Expected utility
Equilibria in mixed strategies

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Lecture objectives

By the end of this lecture, you should be able to

Appreciate the applicability of Nash equilibria
to real world situations
Identify the benefits and harms of both noncooperative
and cooperative play across different scenarios
Derive mixed-strategy Nash equilibria

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Section 2

Review

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The beauty contest exemplifies IESDS

Recall the beauty contest you played last week

Remember how (almost) all of you chose lower numbers

the second time around?

You did this because you were subconsciously carrying out IESDS!

The beauty contest game is also great at highlighting

the importance of thinking in terms of best responses

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Reviewing the battle of the sexes

Let’s consider how the various solution concepts we’ve learned

apply to the battle of the sexes game

Bob
Opera Boxing

Opera 1, 2 0, 0
Alice

Boxing 0, 0 2, 1

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Reviewing hawk-dove

Let’s consider how the various solution concepts we’ve learned

apply to the hawk-dove game

Player 2
Dove Hawk

Dove 3, 3 1, 4
Player 1

Hawk 4, 1 0, 0

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Let’s play the public goods game

You will play the public goods game as one group:

You have $20 to start the game
Choose an amount x ∈ [0, 20] to contribute to a common pot
The pot of money is totaled (call this Σ)
The pot of money is grown by a factor of 2
The grown pot (2Σ) is divided evenly and redistributed
You finish the game with 20 − x + 52 Σ

Any questions?

What observations can you make about this game?

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How realistic are Nash equilibria?

Here’s the Prisoners’ Dilemma again, but with modified payoffs:

Player 2
Mum Fink

Mum 0, 0 −100, 1
Player 1

Fink 1, −100 −99, −99

What’s the NE in this version of the Prisoners’ Dilemma?

How realistic is this outcome?

Key takeaway: Risk neutrality is a crucial (but not necessarily

realistic) assumption to our analysis
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Let’s be clear about our assumptions

Having just considered the risk neutrality assumption,

let’s think about the other critical assumptions we typically make

rationality: predicting a Nash equilibrium only makes sense

when all players are rational
self-interest: this makes payoff calculations easier,
but it’s straightforward to adapt games to allow for altruism

Speaking of altruism, here’s a brilliant take

on a deep philosophical question:
Friends: “There’s no unselfish good deed”

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Do you have any questions about solution concepts?

Are there any more questions about Pareto Optimality, IESDS,

or Nash equilibria?
(If you’re struggling with a concept, then I guarantee
at least one of your classmates is struggling with it, too)

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Can a game lack Nash equilibria?

Is it possible for a game not to have any Nash equilibria?

We’ll come back to this question later tonight

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Zero-sum games

Let’s discuss games that require mixed strategies in equilibria

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Section 3

Closing

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Key lessons

Mixed strategies arise in game play for a variety of reasons

Mixed strategies are not inherently optimal:

an optimal mixed strategy is just a mixture
of optimal pure strategies

The specific mixture a player chooses in a Nash equilibrium

is selected to create an indifference for other players,
thus providing those other players the opportunity
to optimally play mixtures as well

The “no-regrets” interpretation of NE must be recast

when using mixed strategies

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On your own

Podcast:
Mixed strategies

Please prepare 2 questions based on this podcast

to ask at the beginning of the next lecture

Suggested Readings:
In Game Theory: An Introduction:
Chapter 5
Chapter 6
In Game Theory for Applied Economists:
Section 1.3

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Post-lecture feedback

Please remember to submit your anonymous post-lecture feedback:

Muddiest point
Eureka moment
General comments, suggestions, or concerns (or “N/A”)

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