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9 views10 pages

Paras Lecture Slides Lecture 9

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Game Theory and its Applications

(BITS F314)

Paras Sachdeva

Department of Economics and Finance


BITS Pilani, Pilani Campus

www.parassachdevaeco.com

Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)
Game Theory and its Applications

Existence of Nash Equilibrium

Sufficient conditions for the existence of nash equilibrium

Given a strategic form game Γ = ⟨N, (Si ) , (ui )⟩, a pure strategy Nash
equilibrium exists if ∀i ∈ N,
Si is a non-empty, convex, and compact subset (of some Euclidean
space)
ui (s1 , . . . , sn ) is continuous in (s1 , . . . , sn )
ui (si , s−i ) is quasi-concave in si .

Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)
Game Theory and its Applications

Existence of Nash Equilibrium

Proof using Fixed Point Theorem

Kakutani’s Fixed Point Theorem Suppose that X ⊂ Rn is a


non-empty, compact, and convex subset of Rn . Let f : X ⇒ X be a
correspondence such that

f is upper hemicontinuous
f (x) ⊂ X ∀x ∈ X is non-empty and convex.

Then f has a fixed point in X .

Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)
Game Theory and its Applications

Existence of Nash Equilibrium

Best Response Correspondence and Fixed Point Theorem

Let
bi (s−i ) = si ∈ Si : ui (si , s−i ) ≥ ui si′ , s−i ∀si′ ∈ Si
 

Best Response Correspondence b : S ⇒ S

b (s1 , . . . , sn ) = b1 (s−1 ) × . . . × bn (s−n )

Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)
Game Theory and its Applications

Existence of Nash Equilibrium

Best Response Correspondence and Fixed Point Theorem

If b : S ⇒ S satisfies following conditions:

b is upper hemicontinuous
b(s) ⊂ S ∀s ∈ S is non-empty and convex.

Then, according to the fixed point theorem, b has a fixed point s ∗ in


S such that b(s ∗ ) = s ∗ .

Nash equilibrium exists.

Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)
Game Theory and its Applications

Existence of Nash Equilibrium

If we show

Si is a non-empty, convex, and compact subset (of some Euclidean


space)
ui (s1 , . . . , sn ) is continuous in (s1 , . . . , sn )
ui (si , s−i ) is quasi-concave in si .

implies

b is upper hemicontinuous.
b(s) ⊂ S ∀s ∈ S is non-empty and convex.

Nash equilibrium exits.


Proof: see book Game Theory and Mechanism Design by Y Narahari
Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)
Game Theory and its Applications

Existence of Nash Equilibrium

Basic Definitions

Closed Set: A set X is closed if it contains its boundaries. All


sequences in the set X converges to a point in X.

Bounded Set: A set X is bounded if it has upper bound and lower


bound..

Compact Set: A set X is compact if it is closed and bounded..

Convex Set: A set X is convex if all the linear combinations of the


elements of X are in X.

Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)
Game Theory and its Applications

Existence of Nash Equilibrium

Basic Definitions

Quasi Concavity: A function f : X → R (where X is a convex


subset of a linear space) is quasiconcave if

f (tx + (1 − t)y ) ≥ min{f (x), f (y )}

for any x, y ∈ X , t ∈ [0, 1].

A function f : X → R is quasiconcave if the upper contour set is


convex.

Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)
Game Theory and its Applications

Existence of Nash Equilibrium

Basic Definitions

Correspondence: A correspondence f : X ⇒ Y is a mapping which


associates each x ∈ X with a subset f (x) of Y

Graph of a Correspondence Let X ⊂ Rn and let Y ⊂ Rk be a


closed set. The graph of the correspondence f : X ⇒ Y is the set
{(x, y ) : x ∈ X , y ∈ f (x)}.

Closed Graph Correspondence Given X ⊂ Rn and a closed set


Y ⊂ Rk , the correspondence f : X ⇒ Y is said to have a closed
graph if for any two sequences x m → x ∈ X and y m → y ∈ Y , with
x m ∈ X and y m ∈ f (x m ) for every m, we have y ∈ f (x).

Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)
Game Theory and its Applications

Existence of Nash Equilibrium

Basic Definitions

Upper Hemicontinuity Given X ⊂ Rn and a closed set Y ⊂ Rk , the


correspondence f : X ⇒ Y is said to be upper hemicontinuous (uhc)
if it has a closed graph and the images of compact sets are bounded.

Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)

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