Scribd
Upload
5 views

ECON 201 - Week #2 - Notes - Part 2

ECON 201 - Week #2 - Notes

Uploaded by

teamfighteryi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
5 views

ECON 201 - Week #2 - Notes - Part 2

ECON 201 - Week #2 - Notes

Uploaded by

teamfighteryi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 28

ECON 201:

GAMES AND STRATEGIES


SIMULTANEOUS - MOVE GAMES
PART 2
Strict Nash Equilibrium
• Definition: a strict Nash Equilibrium of the game
G = ( N , (S1,…,Sn) , (u1,…,un) )
• is a strategy profile (s1*,…,sn*) such that for every player i in N,
ui( si* , s-i* ) > ui( si , s-i* )
• for every si in Si different than si* .
Two firms (duopolists), choosing prices
Firm 2

Low High
600, 600 1200, -200
Low
Firm 1

-200, 1200 1000, 1000


High
Best Response Analysis
• The best response correspondence of agent i: Bi(.)
for each strategy profile of the other agents, s-i,
Bi(s-i) is the set of agent i’s strategies that maximize his payoff
i.e. the set of agent i’s best responses to s-i
• Bi( s-i ) = { si* in Si such that
ui ( si* , s-i ) ≥ ui ( si , s-i )
for all si in Si }
• Typically, there are several best responses and Bi( s-i ) is a set.
• In some games however, there will always be a single best
response.
• Only for such games, the best response function of agent i: bi(.)
• for each strategy profile of the other agents, s-i,
bi(s-i) is the strategy of agent i that uniquely maximizes his
payoff
• i.e., the unique best response of agent i to s-i
• bi(s-i)= si* in Si such that
ui ( si* , s-i ) > ui ( si , s-i )
for all si in Si
• Remember the Definition:
• A Nash Equilibrium of the game
• G = ( N , (S1,…,Sn) , (u1,…,un) )
• is a strategy profile (s1*,…,sn*) such that for every player i in N,
• ui( si* , s-i* ) ≥ ui( si , s-i* )
• for every si in Si.

• New (equivalent) Definition:


• A Nash Equilibrium of the game
• G = ( N , (S1,…,Sn) , (u1,…,un) )
• is a strategy profile (s1*,…,sn*) such that for every player i in N,
• si* is in Bi(s-i* )
• If all agents’ best responses are functions,
• the definition can be written as:

• a Nash Equilibrium of the game

• G = (N , (S1,…,Sn) , (u1,…,un) )

• is a strategy profile (s1*,…,sn*) such that for every player i in N, si*=


bi(s-i* )
Application: Dividing the Money
• Players: Player 1 and 2
• Strategies: Declare how much of 4 Million TL you want
• (Player 1declares x and Player 2 declares y from {0, 1, 2, 3, 4}
• Payoffs:
if x+y ≤ 4, (x, y)
if x+y > 4 , and x < y (x, 4-x)
if x+y > 4, and x > y (4-y, y)
if x+y > 4, and x=y (2, 2)
Finding the Best Response

l r
5, 1 0, 2 Which strategy would you choose?
U

1,3 4, 1
M

4,2 2, 3
D
Finding the Best Response: Sheet 1
Finding the Best Response: Sheet 2
Penalty Kick Game

l r
4,-4 9, -9 Which strategy would you choose?
L

6, -6 6, -6
M

9, -9 4, -4
R
Penalty Kick Game: Sheet 1
Application: A Synergistic Relationship
• Players: 1 and 2
• Strategies: choose effort level ai (any nonnegative real number)
• Payoffs:
• u1 ( a1 , a2 ) = a1 ( c + a2 – a1 )
• u2 ( a1 , a2 ) = a2 ( c + a1 – a2 )
A Synergistic Relationship: Sheet 1
How to obtain the best-response functions
from the players’ payoff functions ?

• Need to take derivatives of the payoff (profit) functions and


equate them to 0.
• Need to check the second derivatives to make sure that they
are maximized.
• Check the boundaries of the strategy set as well
• In our example
u1 ( a1 , a2 ) = a1 ( c + a2 – a1 )
• The first derivative is equated to zero:
( c + a2 – a1 ) + a1 ( - 1 ) = 0
a1* = 0.5 ( c + a2 )
• Note that the second derivative is -2
• So a1* maximizes i’s payoff in response to a2
• So a1* is the best response to a2
• The best response functions:
• b1 ( a2 ) = 0.5 ( c + a2 )

• Nash equilibrium (from the graph):


• Draw the graphs of the two best response functions and check
the intersection.
The players’ best response functions for the
game
The Nash equilibrium (from calculation):
• ( a1 , a2 ) such that a1 = b1 ( a2 ) = 0.5 ( c + a2 )
a2 = b2 ( a1 ) = 0.5 ( c + a1 )
a1 = 0.5 ( c + a2 ) = 0.5 ( c + 0.5 ( c + a1 ) )
a1 = c
( a1 , a2 ) = ( c , c )
In Class Game: Partnership Game
• 2 agents own the firm jointly, share 50% of profit

• Each agent choose her effort level to put into this firm
Si= [0, 4]
Firm profit is given by 4(s1+s2+bs1s2) 0 ≤ b ≤ ¼
U1(s1, s2)=1/2[4(s1+s2+bs1s2)]-s1²
U2(s2, s1)=1/2[4(s1+s2+bs1s2)]-s2²

• Find the best response of the agents.


Partnership Game: Sheet 1
Partnership Game: Sheet 2
In Class Game: Cournot Duopoly
• Players: 2 Firms

• Strategies: Firms produce identical products , s1 and s2


• Cost of production c-s
• Prices: a=b(s1+s2)
• Find the best responses for the players.
• Find the NE of the game
Cournot Game: Sheet 1
Cournot Game: Sheet 2

You might also like