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On economic application of evolutionary game theory

Article in Journal of Evolutionary Economics · April 1998

DOI: 10.1007/s001910050054 · Source: RePEc

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J Evol Econ (1998) 8: 15±43

On economic applications
of evolutionary game theory
Daniel Friedman*
Department of Economics, University of California at Santa Cruz,
212 Social Sciences I, Santa Cruz, CA 95064, USA

Abstract. Evolutionary games have considerable unrealized potential for

modeling substantive economic issues. They promise richer predictions than
orthodox game models but often require more extensive speci®cations. This
paper exposits the speci®cation of evolutionary game models and classi®es
the possible asymptotic behavior for one and two dimensional models.
Key words: Evolutionary games ± Adjustment dynamics ± ESS ± Evolu-
tionary equilibrium
JEL-classi®cation: B25; C62; C72; C73

1 Introduction

Evolutionary games have seized a large and increasing share of the game
theory literature in recent years. But economic applications of evolutionary
game theory remain few and isolated, while a dominant share of the applied
economics literature relies on orthodox game theory. A casual observer
might surmise from these facts that the new evolutionary approach is in-
tractable or not widely applicable, or that its implications are essentially the
same as those of the orthodox approach.

* My thanks to the fellows and sta€ of CentER at Tilburg University for providing the
stimulating environment in which this paper was originally written, and to K.C. Fung for
his help and encouragement in beginning the project. Vince Crawford, Jorgen Weibull,
three anonymous referees, and audiences at Tilburg, Arizona, UCSC and Florence pro-
vided useful comments on earlier versions. I retain sole responsibility for any remaining
errors and idiosyncrasies.
16 D. Friedman

In this paper I argue to the contrary that evolutionary game theory is

quite tractable, that it has a wide range of applicability which di€ers
somewhat from that of orthodox game theory, and that the evolutionary
approach promises distinctive insights and implications in substantive
economic applications. My main purpose is to present basic analytical tools
of evolutionary game theory so that the general reader can begin to use
them. In passing I mention some of the literature but do not survey it
systematically. I present a classi®cation of low dimensional evolutionary
games, but it requires only very minor extensions of existing results. In
short this paper is more of a user's manual than a survey or a research
article.
The rest of this introduction addresses preliminary questions. Section 2
o€ers detailed but non-technical remarks on the speci®cation of evolu-
tionary game models. Section 3 classi®es the asymptotic behavior in the one
and two dimensional models which are likely to be the most useful for
applications. Brief concluding remarks appear in Section 4. Appendix A
collects some analytical details; it should be accessible to most recent PhD
economists. Appendix B points out some of the relevant literature on
evolutionary dynamics.

A. What is an evolutionary game?

By an evolutionary game, I mean any formal model of strategic interaction

over time in which (a) higher payo€ strategies tend over time to displace
lower payo€ strategies, but (b) there is some inertia, and (c) players do not
systematically attempt to in¯uence other players' future actions. Condition
(a) is a version of the basic ``survival of the ®ttest'' maxim, while (b) dis-
tinguishes evolutionary change from revolutionary change and means that
aggregate behavior does not change too abruptly. Underlying reasons in-
clude various sorts of adjustment costs, or informational imperfections, or
perhaps bounded rationality. Condition (c), referred to below as the game
against Nature (GAN) condition, distinguishes evolutionary games from
repeated games with trigger strategy threats, etc. It can be justi®ed by appeals
to large numbers of players, or to players' myopia. I shall argue in section 2
that in practice these conditions are even less restrictive than they seem.
Some authors adopt a narrower de®nition of evolutionary games by
imposing various additional assumptions such as large populations,
bounded rationality, random matching, and observable strategies. I shall
now argue that such restrictions are unnecessary.

B. Where might evolutionary games be applicable?

Biologists and mathematicians originally developed evolutionary games to

address substantive questions in evolutionary biology (Maynard Smith and
Price, 1973; Maynard Smith, 1982; Taylor and Jonker, 1978). Strategic
interaction over time arises because the ®tness of a biological trait or be-
havior often depends not just on the background environment but also on
the prevalence in the current population of the behavior and the prevalence
On economic applications of evolutionary game theory 17

of alternative behaviors. For example, an animal's aggressive behavior in

acquiring resources has higher ®tness when it is rare and hence less likely to
encounter counteraggression.
Economic theorists have found evolutionary games to be very useful for
investigating the foundations of game-theoretic solution concepts, espe-
cially Nash equilibrium (NE) and selection among multiple NE (e.g. Bin-
more, 1991; Fudenberg and Kreps, 1993; Samuelson and Zhang, 1992).
Biological applications routinely and naturally assume myopia, random
matching and genetic transmission of behaviors. Much of the theoretical
economics literature retains these assumptions.
In economic applications, genetic transmission may sometimes underlie
important constraints but generally has too much inertia to produce to
interesting dynamics over relevant timescales. The human gene pool is es-
sentially constant over the economist's long run of a decade or so. But
genetic transmission is not the only evolutionary mechanism; indeed, there
are several alternative mechanisms that produce behavioral change with an
appropriate degree of inertia. Agents with di€erent types of economic be-
havior can enter and exit; market outcomes (or outcomes from other eco-
nomic institutions) can redistribute resources among di€erent types of
agents; and individual agents can change behavior as they accumulate ex-
perience. Later I will cite examples of evolutionary dynamics based on entry
and exit, on resource redistribution, and on learning or imitation.
In short, evolutionary game models are worth considering whenever any
of these mechanisms changes behavior over time and agents interact stra-
tegically, in the sense that the outcome for each agent depends on others'
behavior as well as her own. If agents do not directly and systematically
attempt to in¯uence others' future behavior then evolutionary games pro-
vide a natural approach. It is especially valuable when the relevance of
static equilibria are unclear, e.g., when there are several NE. Potential ®elds
of application include industrial organization, law, economic development,
international trade and policy analysis. The reader can probably think of
other ®elds as well.

C. So why aren't economic applications common already?

In my opinion the reasons are primarily historical. Biologists originally

borrowed the basic idea of evolution from economists and social philoso-
phers, especially Malthus (1798). The biologists closely adapted evolu-
tionary models, eventually including evolutionary games, to ®t biological
applications. Only very recently have economic theorists begun to readapt
the models for economic applications. In particular,
(a) Much of the published evolutionary games literature centers on the
biologists' static equilibrium concept called ESS, for evolutionary stable
state (or strategy). I argue below that ESS can be viewed as a Nash equi-
librium re®nement, but the re®nement is not central to economic applica-
tions.
(b) Replicator dynamics, de®ned below in section 2C, are often assumed
in explicit dynamic models. I shall argue that replicator dynamics are
18 D. Friedman

natural for the genetic mechanism but are less natural for economically
relevant mechanisms such as exit or learning.
(c) A casual reading of most existing literature can easily give the im-
pression that evolutionary games apply only to a single strategically sym-
metric population of agents, that the population must be in®nitely large,
and that interactions must consist of pairwise matches of agents. These
conditions make far more sense in biological applications than in economic
applications. I shall argue that none of these conditions are necessary for
evolutionary game models.
Thus the theoretical literature does not yet provide clear guidance on the
proper application of evolutionary games to substantive economic ques-
tions. But the potential is great. Evolutionary games o€er a di€erent per-
spective on information conditions than orthodox static complete
information (NE) and incomplete information (Bayesian NE) models.
Evolutionary games also o€er a richer set of empirical predictions such as
built-in selection criteria among multiple NE, and predictions of relatively
rapid or slow convergence (or non-convergence) to NE. There is a cost,
however. In addition to the orthodox speci®cation of a payo€ function (or
game tree), the evolutionary game models usually require speci®cation of
initial conditions (or a slice of history) and sometimes also require detailed
speci®cation of adjustment (e.g. learning) dynamics.
In sum, economists must re-adapt evolutionary theory to economics
before evolutionary game models can become routine and widespread. We
must shed some of the biological adaptations and develop some new ad-
aptations for economics.

D. Some relevant literature

The presentation here is based on Friedman (1991) and, despite the patient
e€orts of three generous referees, it remains somewhat opinionated. The
reader will bene®t from other perspectives.
Weibull (1992) is a good place to start. It is a self-contained introduction
to evolutionary game theory, written at the advanced undergraduate or
graduate student level; Weibull (1995) is a more complete and more ad-
vanced treatment. Other advanced texts begin with Bomze and PoÈtscher
(1989) and Cressman (1992), and now include Vega-Redondo (1996),
Samuelson (1997), and Fudenberg and Levine (1997). Chapter-length the-
oretical summaries include Eichberger (1992), Robson (1992) and chapter 9
of van Damme (1991). Hofbauer and Sigmund (1988) is a classic book for a
general scienti®c audience. Several game theory textbooks have some ma-
terial on evolutionary games; Binmore (1992) devotes chapter 9 to the topic.
In¯uential early theoretical papers by economists and game theorists in-
clude Binmore (1987) and Fudenberg and Kreps (1988).
Several journals besides JEE carry relevant theoretical articles. Mailath
(1992) introduces a special issue of the Journal of Economic Theory devoted
to evolutionary game theory; and Selten (1991b) is the lead article in a
special issue of Games and Economic Behavior. Crawford (1993) introduces
a special double issue of Games and Economic Behavior on ``adaptive
On economic applications of evolutionary game theory 19

dynamics'', certainly included in evolutionary game theory on the current

broad de®nition. Dosi et al. (1996) is a long non-technical survey of learning
and evolution. Some readers might also wish to browse the special issue of
Journal of Mathematical Biology introduced by Diekmann et al. (1996).

2 Model elements

An evolutionary game models strategic interaction over time in terms of

one or more populations of players, a state space of strategies, a stage game
in normal or extensive form, and a dynamic adjustment process. At each
moment in time the stage game speci®es the payo€ (or expected payo€ ) to
each strategy, and the state speci®es the current distribution of strategies
employed in each population. Over time, higher payo€ strategies tend to
displace lower payo€ strategies, as speci®ed by the dynamic. As the state
changes over time, the payo€s to di€erent strategies also change, so the time
path can be rather complicated. The analysis focuses mainly on steady
states, especially asymptotically stable steady states, and on the closely
related Nash equilibria of the stage game.
This section will discuss each of these model elements at greater length,
with particular attention to their speci®cation in economic applications.

A. Populations and states

The number K  1 of populations represents the number of economically

distinct roles in the model, where each population k ˆ 1; . . . ; K has Nk  2
alternative strategies available to its members. The state then speci®es the
fractions of each population currently employing each alternative strategy.
For example, consider a two country international trade model where ®rms
in each country choose between two possible modes of internal organiza-
tion. Here K ˆ 2 because, even with identical technologies, ®rms in the two
countries are economically distinct in that they face somewhat di€erent
goods and factor markets. Also N1 ˆ N2 ˆ 2 because each ®rm has two
alternative strategies (organizational modes). The state of each population
is summarized by a point p between 0 and 1 representing the fraction of
®rms currently using the ®rst mode, with 1 p of the ®rms using the second
mode. The state space for each country's ®rms is S 1 ˆ S 2 ˆ ‰0; 1Š and the
overall state space S ˆ S 1  S 2 is the square [0,1]2. Other natural K ˆ 2
models might have co-evolving populations representing buyers and sellers,
or representing gun producers and butter producers.
In any evolutionary game model, the number of populations can always
be reduced to K ˆ 1 by symmetrizing the game or by expanding N1 ˆ N to
cover several role-contingencies (Selten, 1980; Cripps, 1991; Bomze and
PoÈtscher, 1989, Chapters 2.5 and 3.5). This device is useful for theoretical
purposes but can short-circuit an application. In the gun-butter application,
the role-contingent reduced model puts each entrepreneur sometimes in the
gun sector and sometimes in the butter sector, and assumes that his e€ec-
tiveness as a gun producer depends in part on his e€ectiveness as a butter
20 D. Friedman

producer. An unreduced K ˆ 2 model with separate evolutionary paths for

each sector seems more sensible.1
The simplest nontrivial state space is one dimensional, and arises only if
K ˆ 1 and N ˆ 2 so S ˆ ‰0; 1Š, as in the isolated single country part of the
international trade model. There are two types of two-dimensional state
spaces: the square S ˆ ‰0; 1Š2 arising from K ˆ 2 and N1 ˆ N2 ˆ 2 as in the
trade model, and the triangle. The triangle arises from a single population
whose players have three alternative strategies K ˆ 1 and N1 ˆ 3†. For
example, one might model ®rms in an isolated industry as choosing either a
high, medium or low advertising budget. The population fractions are non-
negative and sum to 1 so the state space is the two dimensional triangle
T ˆ f p; q; 1 p q† : 0  p; q and p ‡ q  1g.
There are three types of three-dimensional state spaces: the cube [0,1]3
for K ˆ 3; N1 ˆ N2 ˆ N3 ˆ 2 (e.g. a three country trade model); the prism
T  ‰0; 1Š for K ˆ 2, N1 ˆ 3; N2 ˆ 2 (e.g. a buyer-seller game where buyers
have 3 alternative strategies and sellers have 2); and the tetrahedron
(3-simplex) for K ˆ 1, N ˆ 4 (e.g. workers choose among four occupa-
tions). I will not systematically discuss dimension four and higher; the lower
dimension state spaces are often the most tractable and useful in applica-
tions.
The formal structure presented below, like most of the theoretical lit-
erature, assumes there are in®nitely many (indeed, a continuum of ) indi-
vidual players in each population. The assumption serves four purposes.
First, the actual population size could be growing or declining over time
without a€ecting the state space speci®cation. Second, assuming a large
population allows the analytic convenience of a continuous state space and
dynamics speci®ed by ordinary di€erential equations or di€erence equa-
tions. A ®nite population speci®cation, by contrast, restricts the current
state s to some ®nite lattice, and a large Markov transition matrix (or
something even more cumbersome) is then required to specify the dynamics.
Third, the law of large numbers can be invoked for an in®nite population,
allowing the model to ignore random ¯uctuations and di€ering perceptions
of the current state. Last, and perhaps most important, each individual can
be regarded as small so the GAN condition is easily justi®ed.
In many applications, all four purposes can be adequately served by
fairly small actual populations. The approximations involved in modeling
the state space as a continuum and in ignoring random ¯uctuations,
growth, etc, often are less troublesome than the numerous other simpli®-
cations required to construct a tractable model of some aspect of economic
reality.2

1
One possible candidate for reduction to K ˆ 1 is a worker-consumer model in which an
individual's ®tness is the simple average of her ®tness as a worker and her ®tness as a
consumer.
2
Theorists can't a€ord to be so casual. See for example Boylan (1992), Maynard Smith
(1982) and Riley (1979) for explication of various theoretical issues arising from ®nite or
countably in®nite populations. Binmore and Samuelson (1995) o€er an enlightening in-
tegrated discussion of population size, mutation or error rates, period length and time
horizon. See also the remarks in Section 2C below on local interaction.
On economic applications of evolutionary game theory 21

The real issue is analogous to the price-taking approximation in com-

petitive equilibrium models: is the GAN approximation reasonable, or must
the model consider players' systematic attempts to in¯uence others' future
behavior? The answer is an empirical judgement. My own reading of the
evidence is that the nature of players' interactions is at least as important as
the number of players. For market interactions, laboratory results (Smith,
1982) and some ®eld results (Bresnahan and Reiss, 1991) suggest that in
terms of behavior, three buyers (or three sellers) can be a ``large number''.
Large population models have already been used in applications with
only a few actual players. In numerical simulations of an international trade
model, Friedman and Fung (1996) assume 10 ®rms in each country, but the
analytic model is continuous. Indeed, some theorists use an evolutionary
game model to analyze a situation in which each population consists of a
single individual (e.g. Skyrms, 1986; see also Binmore, 1987±88). (The in-
terpretation of the state s then is the pro®le of mixed strategies contem-
plated by the individual players. The dynamics represent an internal or
virtual adjustment process for beliefs. I will discuss examples in Appendix
B. Obviously the GAN assumption is more problematic in this individu-
alistic interpretation.) My point is that an applied economist should not
require thousands of actual players before considering a price-taking
competitive model or an in®nite population evolutionary model.

B. Stage games

Evolutionary games involve strategic interaction over time. At any point in

time the strategic interaction is expressed as a stage game, an ordinary static
game either in normal (strategic) form or in extensive (game tree) form. For
simplicity I deal here only with stage games in normal form. The reader
interested in extensive form stage games should consult Fudenberg and
Kreps (1988), Fudenberg and Levine (1993, 1997), or Cressman (1997).
A normal form stage game is de®ned by a function f r; s†, called the
®tness or (expected) payo€ function, where r 2 S is the (possibly mixed)
strategy chosen by a speci®c player and s 2 S is the current state. When
there are K  2 populations, f has K components whose values do not
depend on components of r corresponding to other populations, as illus-
trated below.
Most existing literature emphasizes one of two linear speci®cations for
®tness functions. The ®rst, dubbed the symmetric case by Maynard Smith
(1982) involves a single population K ˆ 1† and an N  N matrix
A ˆ aij ††. Players are drawn randomly in pairs and receive expected
payo€ 3 f r; s† ˆ rTAs when playing mixed P strategy r, a point in the
N-simplex S ˆ f x1 ; . . . ; xN † : xi  0 and N1 xi ˆ 1g, against a population
which in aggregate plays mixed strategy s 2 S.

3
The T-superscript denotes the transpose. All vectors are column vectors, but (except in
matrix multiplication) they are written for typographical simplicity as row vectors with the
T superscript suppressed.
22 D. Friedman

A simple one-dimensional example from biology is called Hawk-Dove.

In a single animal population each individual is either aggressive (``hawk'')
or avoids con¯ict (``dove''). For r ˆ x; 1 x† representing the mixed
strategy of playing hawk with probability x 2 ‰0; 1Š and for s ˆ p; 1 p†
representing the current state of the population with fraction p 2 ‰0; 1Š
 
1 2
playing hawk, the ®tness function is f r; s† ˆ rTAs, where A ˆ .
0 1
The story is that damages exceed gains on average in hawk-hawk pairings
so the expected payo€ is 1, that gains are costlessly split in dove-dove
pairings so the expected payo€ is 1 each, and that hawks get all the gains (2)
and doves none (0) when they meet. Cornell and Roll (1981) use essentially
the same ®tness function (payo€ matrix) in their discussion of ®nancial
market participants who can either buy costly information (``hawks'') or
not (``doves'').
The ®tness function here suppresses the distinction between realized
payo€ in a single pairwise encounter, and the expected payo€ averaged
across all possible encounters for the given population state s. The usual
justi®cation is that in a large population the expected payo€ is a sucient
statistic. Another justi®cation, explored below, is that the payo€ is non-
stochastic because it arises not from random pairwise encounters but rather
from general interactions such as voting or markets in a large population.
In the general case, of course, the payo€ can be a nonlinear function of the
state s.
The second popular linear speci®cation, often referred to in the litera-
ture as the asymmetric case, involves two populations (so s ˆ s1 ; s2 † where
each si is a point in the N-simplex) and two N  N matrices, A and B.4 The
payo€ functions are f 1 r; s† ˆ rTAs2 and f 2 r; s† ˆ rT Bs1 . For example,
Friedman (1991) discusses a ``Buyer-Seller'' game where buyers can either
inspect or not and sellers can either report quality honestly or try to cheat.
The payo€ matrices (under current notational conventions) are
   
3 2 2 3
Aˆ for buyers and B ˆ for sellers, e.g. an honest seller
4 1 1 4
gets a payo€ of b12 ˆ 3 when she meets a noninspecting buyer while he gets
a21 ˆ 4.
These linear speci®cations are useful for simple illustrative examples but
are too restrictive for some economic applications. In the ®rst speci®cation
there is only one economic role, and the population interacts with itself. In
the second there are two distinct roles, but each player interacts only with
players in the other population, not with players in his own population, e.g.
f 1 r; s† depends on s2 but not on s1 . That is, the speci®cation rules out own
population e€ects.
Own population e€ects can be important in applications with two or
more populations. In the international trade example, ®rms in the home
country compete in goods markets with foreign ®rms, but also with other

4
The reader should be warned that some of the literature speci®es the transpose BT rather
than B, which can cause some confusion.
On economic applications of evolutionary game theory 23

home country ®rms, so their ®tness depends on both s1 and s2 . The general
linear speci®cation for K ˆ 2 and N1 ˆ N2 ˆ N can be written as
f 1 r; s† ˆ rT As2 ‡ Cs1 † and f 2 r; s† ˆ rT Bs1 ‡ Ds2 †, where the own pop-
ulation e€ects are captured in the two additional N  N matrices C and D.
Many applications require non-linear state dependence (e.g., Balk-
enborg and Schlag, 1995). Market interaction, whether perfectly or im-
perfectly competitive, produces prices and pro®ts that typically are quite
nonlinear in the population distribution of behavior. For example, in a
simple one-country model of ®rms' choice between two modes of internal
organization, Friedman and Fung (1996) use the Nash-Cournot equilibri-
um for given s to express f r; s† as the quotient of fourth degree polyno-
mials in s (with coecients depending on the demand and cost parameters
and the number of ®rms). The work of Blume and Easley (1992) on wealth
dynamics in ®nancial markets provides another example. They express each
individual's expected wealth increment as a nonlinear function of the dis-
tribution of investment strategies in a single population.
Can the ®tness function f r; s† be nonlinear in r as well as in s? It is not
required by any application I have seen in economics (or in biology for that
matter).5 An anonymous referee points out that linearity in r can be re-
garded as a simple notational convenience for summarizing the state de-
pendence of each (pure) strategy, and that it underlies the compatibility
speci®cations discussed in the next subsection. Thus I assume unless oth-
erwise stated that ®tness functions are linear in r and continuously di€er-
entiable (possibly nonlinear) in s.

C. Dynamics

Evolution of the state s 2 S over time can be stochastic or deterministic and

in discrete or continuous time, and attainable states can be the whole
continuum S or a discrete subset. How should an applied economist make
the choice?
As always, the application in principle determines the speci®cation, and
in practice simplicity and convenience are highly valued. For the sake of
simplicity and concreteness I will focus on deterministic, continuous-time,
continuous-state dynamics and refer to other forms only occasionally. Be-
fore proceeding, however, a paragraph is in order on two important sto-
chastic approaches.
Young (1993) and Kandori, Mailath and Rob (1993) pioneered an in-
¯uential discrete stochastic approach that points to risk dominance (or
more generally, to the width of the basin of attraction) to select among
multiple NE. Applied modelers should be cautious about adopting their
conclusions, I believe, because (a) they apply to the cosmologically long run

5
Nonlinearity in r conceivably could be used to represent risk preferences, but I will
ignore the possibility for three orthodox reasons: analytic convenience, approximate risk-
neutrality for (presumably relatively small) single-period payo€s, and (when all else fails)
the game theorist's interpretation of payo€s as ®nal utilities rather than wealth incre-
ments.
24 D. Friedman

and quite di€erent medium term considerations may dominate observed

behavior (e.g., Roth and Erev, 1994), and (b) they postulate an isotropic
stochastic process but actual ``mutation'' or error processes may have im-
portant biases (e.g., Friedman, 1996) which overturn their conclusions
(Bergin and Lipman, 1996). A second stochastic approach, e.g., Ellison
(1993) and Ellison and Fudenberg (1995), employs local interaction models
that allow small scale ¯uctuations to spread even in a large population.
Temzelides (1997) applies this approach to modeling bank panics. Such
models are potentially valuable in applications involving interactions pre-
dominantly among nearest neighbors. The present paper, however, will
focus on non-local interactions of entire populations.
Continuous deterministic dynamics are convenient for at least three
reasons. First, we can get such dynamics from the other kinds by taking an
appropriate limit as the time increment and the scale of random ¯uctuations
go to zero and the number of players goes to in®nity in each population
(e.g., Binmore and Samuelson, 1995). Second, continuity in the state over
time ensures inertia in the sense called for in the introduction. Third, such
dynamics are customarily expressed in the relatively tractable form of a
system of ordinary di€erential equations (ODEs) s_ ˆ F s†, where
s_ ˆ s_ 1 ; . . . ; s_ K † is the rate of change in the state and F s† is a speci®ed
vector valued function. For example, let A be a 2 ´ 2 matrix such as Hawk-
Dove, and let the state s ˆ p; 1 p†. Since S is one dimensional in this
example, it suces to express the ODE as a single equation in p, say6
 
T 1 2
p_ ˆ 1; 1† A p; 1 p† ˆ 1 2p for A ˆ . For a two dimen-
0 1
sional state space we need to specify the time rate of change for two in-
dependent variables, and so on. As explained in the Appendix A, some mild
technical restrictions must be imposed on F to ensure that s is well de®ned
and remains in the state space S (e.g. that the fraction of hawks does not
become negative).
The essence of biological evolution is that ®tter genotypes increase rel-
ative to less ®t genotypes. The economic analogue is that (due to imitation
and learning or resource redistribution or entry and exit) ®tter strategies
increase relative to less ®t strategies in every population. This principle,
called compatibility in Friedman (1991), implies some relationship between
a ®tness function f and the corresponding dynamics s_ ˆ F s†. For nota-
tional simplicity, restrict attention to a single population whose strategy
choices are numbered i ˆ 1; . . . ; N and let ei denote the ith pure strategy. Let
^
fi s† ˆ f ei s; s† ˆ f ei ; s† f s; s† denote the relative ®tness of i, that is,
the absolute ®tness f ei ; s† of purePstrategy i less the current population-
weighted average ®tness f s; s† ˆ Niˆ 1 si f ei ; s†.
There are four popular ways to specify compatibility for the rates of
change s_ i (or, alternatively, for the growth rates s_ i =si † given by F. From
strongest to weakest, the speci®cations are that the si or the s_ i =si †
(a) Are proportional to relative ®tness; or

6
That is, using the payo€ di€erence D de®ned in Section 3A below, we set F s† ˆ
D p†; D p†† for 0 < p < 1.
On economic applications of evolutionary game theory 25

(b) Have the same rank-order as relative ®tness; or

(c) Have the same signs as relative ®tness; or
(d) Are positively correlated with relative ®tness.
Speci®cation (a) is the most popular in the literature. Choosing the time
scale so that the constant of proportionality is 1.0 and equating each growth
rate s_ i =si to relative ®tness f^i s†, one gets the system of ordinary di€erential
equations s_ i ˆ si f ei s; s†; i ˆ 1; . . . ; N , generally referred to in the litera-
ture as replicator dynamics (or occasionally as Malthusian dynamics).
 
1 2
For example, the Hawk-Dove game with matrix A ˆ and the
0 1
usual parametrization s ˆ p; 1 p† yields ei s ˆ 1; 0† p; 1 p† ˆ
1 p† 1; 1†, so here replicator dynamics is the single cubic ODE
s_ 1 ˆ p_ ˆ p 1 p† 1; 1†T A p; 1 p† ˆ p 1 p† 1 2p†.
Replicator dynamics have a compelling biological justi®cation ± genetic
®tness is measured as the relative growth rate ± but are more dicult to
justify in economic applications.7 An alternative implementation of com-
patibility version (a) equates the rate of change s_ i in the interior P of S to
®tness f ei ; s† relative to the simple average ®tness8 f s† ˆ N1 f ei ; s†, so
we have s_ i ˆ f ei ; s† f s†. In the Hawk-Dove example, we have
p_ ˆ s_ 1 ˆ ‰ 1; 0† 1=2; 1=2†ŠT A p; 1 p† ˆ 1 2p†=2, and more generally
in one dimensional models p_ is proportional to the payo€ di€erence.
Compatibility version (b), generally referred to as monotone dynamics
(Nachbar, 1990; Samuelson, 1991), has become increasingly popular in
applications because of its greater plausibility. But in some applications
even (b) may be too strong. It might turn out that the population fraction
using third best action sometimes grows more rapidly (or shrinks more
slowly) than that for the second best action. In such cases versions (c) or (d)
might be useful. Of course, (b±d) all coincide when there are only Nk ˆ 2

7
Many theorists have accepted the challenge and sought plausible economic underpin-
nings for replicator dynamics. None are completely persuasive but several are interesting
and instructive. Binmore and Samuelson (1995) obtain replicator dynamics as a limiting
case of a complicated process that combines entry and exit, random mutation and aspi-
ration-based imitation. Blume and Easley (1992) get replicator dynamics as a limiting case
of their wealth redistribution process when they directly or indirectly assume that players
try to maximize the growth rate of their wealth, as opposed to maximizing terminal wealth
or present value of consumption utility. BoÈrgers and Sarin (1993) show that transients
(but not necessarily asymptotics) of an individual (but not aggregate) learning model
correspond to replicator dynamics in a limiting case. Unfortunately the learning model is
based on rote learning, not belief learning; for example, the marginal impact of current
information is independent of accumulated information. Finally, Schlag (1994) obtains
replicator dynamics as a limiting case of an imitation process in which players have a
special sort of risk aversion. My point here is that replicator dynamics are a handy
example of compatible dynamics but applied economists should not regard them as ca-
nonical.
8
As explained in Friedman (1991), when working with rates of change rather than growth
rates, one should de®ne the relative ®tness in terms of the simple average of non-extinct
strategies rather than the population weighted average. The distinction is vacuous for
speci®cations (b) and (d) but in principle can a€ect (c) as well as (a).
26 D. Friedman

alternative strategies. See Weibull (1995) for further discussion of (c) and
see Friedman (1991) for further discussion of (d); both versions have
plausible arguments in their favor and also have attractive asymptotic
properties. Appendix B is a brief, unsystematic survey of proposed dy-
namical speci®cations, most but not all of which satisfy compatibility ver-
sions (b±d).
Two further remarks may be in order. An applied economist no doubt
would seek empirical evidence in choosing among the various dynamic
speci®cations. Laboratory data appears the obvious ®rst place to look. The
good news is that laboratory study of adjustment dynamics in games has
become quite popular in the last few years; the bad news is that the work so
far has focused on testing one or a few models in rather special circum-
stances, and a consensus has not yet formed on the most promising general
approaches.
Finally, note that for most popular dynamics the information require-
ments are quite minimal, often just the history of own payo€s. Players do
not necessarily need common (or any) knowledge of opponents' types or
distribution of types in order to converge to ordinary NE. This point is
emphasized in the theoretical literature but the implication for applied
models may not have sunk in: so-called complete information NE can evolve
even when players initially are quite ignorant of each others' circumstances.

D. Equilibria

The biological literature emphasizes a static equilibrium concept called

ESS, for evolutionarily stable state or strategy. The original de®nition is for
a single population linear model with ®tness function f r; s† ˆ rT As for
some given N  N matrix A. It is as follows.

De®nition. A state s 2 S is an ESS if for all other states x 2 S either

(i) f s; s† > f x; s†, or

(ii) f s; s† ˆ f x; s† and f s; x† > f x; x†.

The idea is that the ESS state s resists all possible ``mutations'' x either
because (i) they are less ®t or (ii) they are equally ®t at the current state
(where they are rare) but less ®t when they are prevalent. Using the notation
x ˆ 1 †s ‡ x, one can replace conditions (i) and (ii) by the single
condition

(iii) f s; x † > f x; x † for  > 0 suciently small.

This alternative de®nition is valid for nonlinear ®tness functions and can be
generalized for K  2 models (e.g. Cressman, 1995).
Economists and orthodox game theorists for many years have empha-
sized a somewhat weaker static equilibrium concept called NE, for Nash or
noncooperative equilibrium. For a single population model the de®nition is
simply
On economic applications of evolutionary game theory 27

De®nition. A state s 2 S is a NE it for all x 2 S

(10 ) f s; s†  f x; s†:
It is clear from a comparison of the de®nitions that every ESS is a NE; this
relationship also holds for appropriate generalizations to K  2 models.
The intuitive appeal of ESS is that it supposedly ensures that the equi-
librium is stable. A formal de®nition of stability must refer to the dynamic
F, not simply the ®tness function f for the stage game. The standard dy-
namic de®nitions are that s 2 S is a ®xed point if F s† ˆ 0, and that a ®xed
point s is locally asymptotically stable if every open neighborhood N  S of
s has the property that every path starting suciently close to s remains in
N and converges asymptotically to s. Following Hirshleifer (1982), I shall
refer to such a dynamically stable equilibrium point as an EE or evolu-
tionary equilibrium.9 The largest open set of points whose evolutionary
paths converge to a given EE is called its basin of attraction.
What are the general relationships among these static and dynamic
equilibrium concepts? It turns out that even weak compatibility (version
(d)) suces to ensure that every EE of F is a NE of the underlying ®tness
function f.10 Under the same conditions, every NE of f is a ®xed point (but
not necessarily stable) for F. There are various settings (e.g., replicator
dynamics) which ensure that every ESS of f is an EE of F (e.g., Cressman,
1992, 1995), but in general with weak compatible dynamics ESS is neither
necessary nor sucient for EE (e.g. Friedman, 1991).
Which equilibrium concepts are most useful in applications? I personally
favor EE and NE. It is reasonable to suppose in most applications that
behavior evolves over time according to some (not necessarily deterministic)
dynamic. Behavior is most easily observed when it has settled down, i.e.,
when the state remains near a ®xed point. If the dynamic is not too sluggish
or noisy, then most of the time the state should be near an attractor. Some
theoretical literature emphasizes limit cycles and even more complex at-
tractors called chaotic or strange attractors (e.g. Baumol and Benhabib,
1989) but the corresponding behavior will be dicult or impossible to
observe in practice unless it is recorded very frequently and precisely. In
most applications, then, the useable empirical evidence will generally come
from states near an EE.
There are drawbacks to working with EE. Like ESS, they are not
guaranteed to exist, although virtually every normal form applied model I
know has at least one EE for some compatible dynamics. When they do
exist, EE can be dicult to identify analytically; in general, one must fully
specify the dynamic F, not just the stage game f, and use eigenvalue

9
More generally, a closed set K  S is called an attractor of the dynamic F if every open
neighborhood N has the property that every path starting suciently close to K remains in
N and has limit points only in K, and every point in K is a limit point of such a path. Thus
an EE is an attractor that consists of a single point.
10
Remember that we are dealing with normal form games. The relationship between
evolutionary equilibrium and Nash equilibrium is more complicated for extensive form
games; see for example Fudenberg and Levine (1993).
28 D. Friedman

techniques on its Jacobian matrix or more advanced techniques (e.g.

Lyapunov functions) to verify that a ®xed point is an EE. The next section
shows that in some cases ESS is a useful sucient condition for EE.
However, applied economists more often focus attention on NE, and the
current discussion suggests that this is a good ®rst step. Quite generally, NE
is a necessary condition for EE, and NE are directly computable from the
stage game ®tness function f. The next section demonstrates that sometimes
a little knowledge of the dynamics can suce to eliminate the unstable NE
and isolate the EE.

3 Local classi®cation of low-dimensional systems

Low dimensional models are especially tractable for applications. Such

models permit a rather limited repertoire of asymptotic behavior. This
section classi®es generic behavior11 in one and two dimensions for dynamics
speci®ed as ordinary di€erential equations and mentions some additional
considerations in passing. The one dimensional results and the two-di-
mensional no-own-population-e€ects results go back at least to Zeeman
(1980) and Eshel and Akin (1982). Here ESS is a sucient condition and
NE is a necessary condition for dynamic stability.

A. Linear one-dimensional games

Recall that in the one-dimensional case there is only one population (K ˆ 1)

and two pure strategies (N ˆ 2), so the state space S ˆ
f p; 1 p† : p 2 ‰0; 1Šg can be parametrized by a point p in the unit interval
[0,1] representing the fraction of players currently employing the ®rst pure
strategy. The ®tness function f r; s† speci®es the expected payo€ to any
player choosing mixed strategy r ˆ x; 1 x†, i.e. taking the ®rst action with
probability x and the second action with probability 1 x. If f
is
linear in
s ˆ p; 1 p† as well as in r, then for some 2  2 matrix A ˆ aij it can be
written as f r; s† ˆ rT As ˆ xpa11 ‡ x 1 p†a12 ‡ 1 x†pa21 ‡ 1 x†
1 p†a22 .
For one-dimensional evolutionary games, compatibility versions (b±d)
all reduce to saying that the action with the higher current payo€ will tend
over time to displace the action with the lower payo€. That is, the direction
of change in s ˆ p; 1 p† is entirely determined by the sign of the payo€
di€erence d s† ˆ f e1 ; s† f e2 ; s† ˆ f 1; 1†; s† between the ®rst pure
strategy e1 ˆ 1; 0† and the second pure strategy e2 ˆ 0; 1†: if d s† > 0 then
p increases and s moves towards (1,0), while if d s† < 0 then p decreases and
s moves towards (0,1).
The analysis is completely transparent when the payo€ di€erences d s† is
written in terms of p and the components of A, so

11
That is, I usually ignore knife-edge cases because small structural shocks (e.g. small
perturbations of matrix elements) will eliminate these cases. Again, extensive form stage
games require a more complex analysis than I will provide here.
On economic applications of evolutionary game theory 29

D p† ˆ d s p†† ˆ 1; 1†T A p; 1 p† ˆ 1 p† a12 a22 † p a21 a11 †

ˆ 1 p†a1 pa2 ;
where the reduced parameters are a1 ˆ a12 a22 and a2 ˆ a21 a11 . Then
compatible dynamics ensure that p_ l 0 as D p†l0, so only the sign of D p†
matters. The graph of D p† is a straight line with intercept a1 at p ˆ 0 and
value a2 at p ˆ 1. Apart from the degenerate case a1 ˆ a2 ˆ 0 in which a
player is always indi€erent between her two actions, we have only three
possibilities.

Type 1: If a1 ; a2 > 0 then the unique root of D p† ˆ 0 is p ˆ a1 = a1 ‡ a2 †.

It is easy to see that p is the only NE and the only ESS. More importantly
for present purposes, D is downward sloping so p increases (decreases)
whenever it is below (above) p . Hence p is the unique evolutionary
equilibrium. That is, for any compatible continuous-time dynamic s_ ˆ F s†
we have s t† ! p ; 1 p † as t ! 1 from any initial state s 0†. The same
conclusion also holds for discrete time t ˆ 0; 1; 2; . . .† dynamics
Ds t† ˆ aF s t†† on S if we add the proviso that the adjustment rate pa-
rameter a > 0 is not too large. (We can get unstable oscillations if pt‡1
jumps too far over p .) Examples of type 1 games include symmetric ver-
 
1 1
sions of Matching Pennies (e.g. A ˆ so a1 ˆ a2 ˆ 2† and
  1 1
1 2
Hawk-Dove (e.g. A ˆ so a1 ˆ a2 ˆ 1).
0 1

Type 2 : For a1 ; a2 < 0, the root p ˆ a1 = a1 ‡ a2 † of D p† ˆ 0 is still a NE

of the associated symmetric bimatrix game, but now both pure strategies
p ˆ 0 and p ˆ 1 are also NE. The pure strategies both are ESS, but p is
not. As Figure 1 makes clear, D p† slopes upward and is negative (positive)
for p < p p > p †, so p is an unstable ``source'' separating the basins of
attraction of the two evolutionary equilibria p ˆ 0 and p ˆ 1. An economic
interpretation is that each pure strategy has increasing returns in type 2
games and decreasing returns in type 1 games. Type 2 games  areoften
5 1
called symmetric coordination games. An example is A ˆ :
4 1

Type 3: If D p† lies on or above (on or below) the p-axis for all p 2 0; 1†,
then the second pure strategy p ˆ 1 (the ®rst pure strategy p ˆ 0) is dom-
inant. Of course, the dominant strategy is the unique NE (and ESS) and the
unique evolutionary equilibrium for any sign-preserving dynamic F . This
type of game is characterized by a1
a2  0 (and ja1 j ‡ ja2 j > 0). The most
interesting example is Prisoner's Dilemma, in which payo€s  decrease as
 the
1 1
dominant strategy becomes more prevalent, e.g. A ˆ so
2 0
a1 ˆ a2 ˆ 1.
30 D. Friedman

Fig. 
1. Linear  one-dimensional evolutionary games. Notes: For payo€ matrix
a11 a12
Aˆ , de®ne a1 ˆ a12 a22 and a2 ˆ a21 a11 . The point s p† ˆ p; 1 p†
a21 a22
represents the current evolutionary state for 0  p  1. The current payo€ di€erence
between the two pure strategies is D p† ˆ 1 p†a1 pa2

B. Two-dimensional systems: The asymmetric case

Recall the square S ˆ ‰0; 1Š2 is a two dimensional state space that arises in
two-population, two-strategy games (K ˆ 2; N1 ˆ N2 ˆ 2). In the so-called
asymmetric case ± linear ®tness functions and no own population e€ects ±
we have 2  2 matrices A and B such that f 1 r; s† ˆ rT As2 and
f 2 r; s† ˆ rT Bs1 . De®ne the reduced parameters a1 ˆ a12 a22 and a2 ˆ
a21 a11 as before, and analogously de®ne b1 ˆ b12 b22 and b2 ˆ
b21 b11 . At ®rst it might seem that there are 9 cases of the form x y
where x runs through the 3 cases in the last subsection for the a parameters
and y does the same for the b parameters. However, Appendix A shows that
there actually are only 3 distinct generic cases, illustrated in Figure 2.
Cases 3 y and x 3 (Corner): If a1 and a2 have opposite signs, then there
is a dominant strategy for the ®rst population. The unique EE (and NE and
ESS) is the corner corresponding to the ®rst population all adopting the
dominant strategy and the second population all making the best response
(see panel A of Fig. 2). The same characterization applies whenever b1 and
b2 have opposite signs; of course, then the corner corresponds to the second
population all adopting their dominant strategy and the ®rst population
best-responding. Adaptations of textbook entry deterrence models (e.g.
Katz and Rosen, 1991, p. 581) are easy examples.
Cases 1 1 and 2 2 (Saddle): If all reduced parameters are positive then
there is a completely mixed NE at s ˆ p ; 1 p †; q ; 1 q ††, where
p ˆ a1 = a1 ‡ a2 † and q ˆ b1 = b1 ‡ b2 †. This NE is a saddlepoint of the
On economic applications of evolutionary game theory 31

Fig. 2A±C. Two-dimensional asymmetric games.

A Dominant strategy. B A saddle. C A center

dynamics. There are two pure strategy NE, both also EE as well as ESS, at
the corners p; q† ˆ 1; 0† and (0,1) of the square. Their basins of attraction
are separated by the saddlepath to s (see panel B of Fig. 2). If all reduced
parameters are negative then the result is the same except the EE/ESS are at
the corners (1,1) and (0,0). Friedman and Fung (1996) obtain this case when
there is free trade in goods but not in factors.
Cases 1 2 and 2 1 (Center): If ai are both positive and bi both negative,
then s is the unique NE. It is not an ESS. The time path of every other
initial state spirals around s clockwise (see panel C of Fig. 2). Whether s is
asymptotically stable (an EE) depends on the dynamic speci®cation. In
version (a) ± e.g. replicator or linear dynamics ± s is neutrally stable and
the spirals are closed orbits (cycles). Versions (b±d) allow outward spirals
(unstable) or inward spirals (EE). The case in which the parameters bi are
both positive and the ai are both negative is the same except that the spirals
are counterclockwise. This case is illustrated in the basic Buyer-Seller game
in Friedman (1991).
Remarks:

1. Zeeman (1980) and Hofbauer and Sigmund (1988) o€er a fairly

complete classi®cations for N-strategy one-population linear games under
replicator dynamics.
32 D. Friedman

2. For replicator dynamics there is an interesting generalization which

applies to higher dimensional ``asymmetric'' (linear, no own-population
e€ects) cases. It can be shown that the dynamics are volume-preserving
(Hofbauer and Sigmund, 1988, Ch. 27) so internal NE (i.e. completely
mixed strategy NE) can never be EE. Such NE are either saddlepoints or
neutrally stable centers.
3. Selten (1991a) notes that the lack of internal EE applies to discrete-
time linear dynamics as well as continuous time replicator dynamics. He
shows that ``anticipatory learning'' can stabilize the Center case and higher
dimension analogues. Roughly speaking, if the linear dynamics are
Ds ˆ L s† then the anticipatory dynamics are Ds ˆ L s ‡ L s††.
4. It may be worth emphasizing that the one-dimensional linear game
with payo€ matrix A (and payo€ matrix AT for the opponent in a pairwise
random matching setting) is not equivalent to the two population ``asym-
 
T 1 0
metric'' game (A; A ). Take a type 1 matrix, say A ˆ . We have
2 1
seen that the one-dimensional game has a unique NE and a unique EE at
p ˆ a= a ‡ b† ˆ 2 1†=‰ 2 1† ‡ 0 1††Š ˆ 12. The two-dimensional


game (A; A ) falls into case 1 1. Its interior NE at p; q† ˆ 12 ; 12 is not an
T

EE, but its two corner NE at p; q† ˆ 1; 0† and at (0,1) are EE. This is
analogous to behavior in one dimensional games of type 2, not type 1.

C. Other two-dimensional systems and nonlinear systems

Consider now the possibility of own-population e€ects in linear ®tness

functions on the square. As shown in Appendix A, it is still true that there is
at most one interior NE. In addition to the saddle and center cases already
encountered, two further types of behavior, called source and sink in
Figure 3, are possible at an interior NE. Appendix A shows that some
®tness functions have an interior NE which is an EE (a sink or stable center)
for any compatible dynamic, while for other ®tness functions the interior
NE is a source or unstable center for every compatible dynamic and
therefore never an EE. As with the center case illustrated in Figure 2C,
there are also ®tness functions for which some compatible dynamics make

Fig. 3A,B. Other linear games on the square. A A sink. B A source

On economic applications of evolutionary game theory 33

the interior NE an EE and other compatible dynamics make it unstable (not

an EE). For simplicity I retain the same label, center, for this case, even
though the range of compatible behavior now includes sources and saddles
as well as stable and unstable spirals. Behavior along the edges of the square
can exhibit all the main one dimensional cases, depending on the ®tness
function.
Recall that linear games on the triangle are speci®ed by a ®tness function
f r; s† ˆ rT As, where A ˆ aij †† is a 3  3 matrix. By varying the aij 's, one
can get every type of generic behavior ± a dominant strategy (so the cor-
responding corner is a global sink and therefore an EE ), a dominated
strategy so paths converge to the opposite edge of the triangle, or an in-
terior NE. All four types of behavior illustrated in Figures 2B,C and 3 ±
saddle, center, source and sink ± are possible at an interior NE. All three
types of behavior illustrated in Figure 1 are possible along the edges of the
triangle.
Allowing ®tness functions that are non-linear in s creates fewer practical
complications than one might suppose. First consider one-dimensional
games. The payo€ di€erence D p† ˆ f 1; 1†; s p†† between the two
available pure strategies can cross the p-axis several times. These crossing
points (sometimes augmented by one or both endpoints p ˆ 0; 1) constitute
the NE of f. Generically the crossings are transverse ± the tangent to D(p) is
not horizontal at the roots p of D p† ˆ 0. Then analysis reduces locally to
cases 1 and 2 in Figure 1, depending on whether D is downward or upward
sloping. Speci®cally, an interior root p is always an NE, and is an EE
whenever D0 p † < 0 but separates the basins of attraction of neighboring
EE whenever D0 p † > 0, as illustrated in Figure 4.
In the absence of own-population e€ects, the two-population two-
dimensional non-linear case similarly reduces locally to the corresponding
linear (``asymmetric'') case as follows. Find the roots p to the equation
0 ˆ D2 p†  f1 e1 e2 ; s1 p†† and roots q to the equation 0 ˆ D1 q†
 f2 e1 e2 ; s2 q††. Draw vertical lines at p and horizontal lines at q , so
the square is broken down into rectangles. For generic payo€ functions (e.g.
D0i x † 6ˆ 0 at roots x of Di x† ˆ 0) and any compatible dynamics, the sit-
uation in each rectangle falls into one of the three linear cases shown in
Figure 2.

Fig. 4. A non-linear one-dimensional game. D(p) here is the vertical distance between
f e1 ; s p†† and f e2 ; s p††
34 D. Friedman

General non-linear models on the square or triangle also reduce locally

to one of the linear cases. That is, each interior NE is a local source, saddle,
center or sink; it is never an EE in the ®rst two cases, is always an EE in the
last case, and its status depends on the detailed speci®cation of dynamics in
the third case. Edge and corner NE are either EE (local sinks) or not EE
(saddles or sources) independent of the dynamic speci®cation.
Behavior away from the NE can be fairly complicated in the general
two-dimensional cases. For example, there can be stable or unstable limit
cycles. ``Strange attractors'' and ``chaos'' are possible in three-dimensional
cases, or in lower dimensions for discrete-time dynamics. In most applied
work, it suces to identify the EE and their basins of attraction. Empiri-
cally it will be dicult to detect systematic behavior elsewhere.
Since most economists feel more comfortable specifying stage games
than specifying continuous time dynamics, it is good to know that the EE
and their basins of attraction always are independent of the choice of
compatible dynamics in dimension 1 and in three of four cases in dimen-
sion 2. In state spaces of dimension 3 and higher the dynamic speci®cation
matters in a larger fraction of cases.

4 Summary and discussion

Many interesting economic issues can be modeled in terms of interactions

among a few distinct populations, each with a few alternative actions. If
entry and exit or resource redistribution or learning tends to increase the
prevalence of higher-payo€ actions over time in each population, then an
evolutionary game model may be appropriate. Time paths in such models
quite generally converge to evolutionary equilibria (EE), a subset of the
Nash equilibria for the underlying stage game. The learning (or other dy-
namic) process, together with the historically given initial state, determines
which EE is attained when there is more than one.
One can be fairly speci®c about the EE and possible asymptotic behavior
in one and two-dimensional continuous-time evolutionary games. As long
as the dynamic speci®cation is an ordinary di€erential equation compatible
with the ®tness function and the ®tness function is qualitatively una€ected
by tiny structural shocks, then there are very short lists of possibilities for
local behavior. The lists apply globally when the ®tness function is linear.
For dimension 1, the list of three possibilities is illustrated in Figure 1.
For dimension 2 and no own-population e€ects, there are again three
possibilities, two involving interior NE, illustrated in Figure 2. Allowing
own-population e€ects on the square or on the triangle introduces two
additional possibilities for interior NE, illustrated in Figure 3. In every
case except one (Fig. 2C) the status of the NE as an evolutionary equi-
librium (EE) or not is determined entirely by the ®tness function and is
independent of the choice of compatible dynamic.
How can one use this classi®cation in practice? It tells the applied
economist directly what sorts of behavior can arise in simple evolutionary
game models. For example, assumptions in the recent literature on the
evolution of money (e.g. Kiyotaki and Wright, 1989; WaÈrneryd, 1989)
On economic applications of evolutionary game theory 35

quickly boil down to saying that we have Type 2 models. Hence we can
conclude from the classi®cation scheme that the outcome will be a corner
EE, which in these models means that we have a unique medium of ex-
change.
Perhaps less obvious but equally important, knowing the classi®cation
(and the basic economic structure) enables the applied economist to predict
the qualitative e€ects of sizeable shocks or regime changes. For example,
Friedman and Fung (1996) rely on the genericity of the classi®cation of
games whose state space is the square to conclude that small changes in
trading costs or supply and demand parameters have no qualitative e€ect
on their trade model's behavior. However, there is a large shock or regime
shift when trade is opened in factors (capital and labor) as well as in goods.
The classi®cation scheme allows the authors to deduce from behavior at the
four corner states that this shock causes behavior to go from case 1±1 to
case 2±2. The policy implications of this transition turn out to be striking
and perhaps surprising: although lowering trade barriers for goods gener-
ally has benign e€ects, it can happen that lowering trade barriers for capital
and labor will impair global productive eciency.
To drive the methodological point home, consider Benabou (1993), an
intricate model of location choice by workers of two types. It appears that
the model's qualitative features are isomorphic to those of the Friedman
and Fung trade model, even though the interpretation is quite di€erent.
Hence the main results of the analysis could be obtained quite directly from
the classi®cation of games with square state spaces.
My discussion emphasizes applications in which the equilibria do not
depend on the details of the dynamic speci®cation. Economists should not
conclude that dynamics are of little interest. The reason for the emphasis
rather is the current lack of tractable and empirically tested models of
learning and other dynamic adjustment processes. Eventually such dynamic
models should become available and greatly expand the scope of evolu-
tionary game models in economics. In the meantime I hope some read-
ers are motivated to ®nd new applications for the simple models presented
here.

Appendix A: Some analytical details

This Appendix ®lls in some analytical details used in Section 3 and else-
where. It relies on elementary methods, the most advanced being eigenvalue
techniques for assessing dynamic stability (e.g. Chiang, 1984, Ch. 15).
Begin with linear games on the square, K ˆ 2 and N1 ˆ N2 ˆ 2. Recall
that the ®tness function
then has a representation
of the form
f 1 r; s† ˆ rT As2 ‡ Cs1 and f 2 r; s† ˆ rT Bs1 ‡ Ds2 , where
Y ˆ A; B; C; D
are 2  2 matrices yij †† and the current state s ˆ s1 ; s2 can be written
s1 ˆ p; 1 p† and s2 ˆ q; 1 q† for p; q† 2 ‰0; 1Š2 . De®ne the payo€ ad-
vantage of the ®rst pure strategy in population i by d i p; q† ˆ
f i 1; 1†; p; 1 p†; q; 1 q†††; i ˆ 1; 2.
The dynamics are speci®ed as ordinary di€erential equations
(p_ ˆ F 1 p; q†; q_ ˆ F 2 p; q††. Trajectories p t†; q t††, also known as solution
36 D. Friedman

curves or evolutionary paths, are solutions to the ODE with given initial
conditions p 0† ˆ po and q 0† ˆ qo . I impose the substantive assumption of
compatibility and two technical restrictions to ensure well-de®ned trajec-
tories. Speci®cally I require that the dynamics (i) vary smoothly with the
state, (ii) have trajectories that do not leave the state space, and (iii) are
weakly compatible. For the square12 , these properties can be formalized as
follows:

De®nition. A dynamic F : ‰0; 1Š2 ! R2 is admissible if

(i) it is continuously di€erentiable,
(ii) F 1 0; q†  0; F 1 1; q†  0; F 2 p; 0†  0 and F 2 p; 1†  0 for all p; q† 2
‰0; 1Š2 , and
(iii) sgnF i p; q† ˆ sgnd i p; q† for all p; q† 2 0; 1†2 .

Recall that the sign function sgn x† is equal to ‡1; 1 or 0 as x is positive,

negative or zero.
First consider the ``asymmetric'' case C ˆ D ˆ 0††. As noted in the
text, d 1 p; q† ˆ 1; 1†A q; 1 q†T ˆ 1 q†a1 qa2 , where a1 ˆ a12 a22
and a2 ˆ a21 a11 , is independent of p. Similarly, d 2 p; q† ˆ 1 p†b1 pb2
is independent of q because there are no own-population e€ects. Conse-
quently admissible dynamics take speci®ed signs in rectangular regions of
‰0; 1Š2 bounded by the lines d 1 q† ˆ 0 and d 2 p† ˆ 0.
The analysis is elementary and falls into several cases depending on the
signs of the ai and bi . I ignore several cases where some ai or bi is zero
because they are tedious and non-generic. Other cases are labelled 1 x
(respectively x 1) if ai (respectively bi ) are both positive, 2 x (respec-
tively x 2) if ai (respectively bi) are both negative, and 3 x (respectively
x ) 3) if a1 a2 < 0 (respectively b1 b2 < 0).
Begin with case 3 x. Then population 1 players have a dominant
strategy because d 1 q† > 0 or < 0 on the interior of the square. Conse-
quently all trajectories tend towards the edge of the square p ˆ 0 or p ˆ 1
corresponding to the dominant strategy. If d 1 p † > 0 < 0† then clearly the
upper end (lower end) of this edge is the limit of every trajectory as t ! 1.
Thus it is the unique EE for any admissible dynamic. The same analysis and
conclusion holds for case x 3: the unique EE is the right or left end of the
edge corresponding to the dominant strategy q ˆ 0 or q ˆ 1 as d 2 q † > 0
or < 0.
In the other cases the ai 's have the same sign, so d 1 q† ˆ 0 for
q ˆ a1 = a1 ‡ a2 † 2 0; 1†, and likewise d 2 p† ˆ 0 for p ˆ b1 = b1 ‡ b2 † 2
0; 1†. The point p ; q † obviously is a NE because for each population, at
this point, all actions are equally ®t. The vertical and horizontal lines
through p ; q † divide the square into four quadrants (rectangles) in which
the signs of p_ and q_ are constant.
Consider case 1 1 and initial state in the NE quadrant. Since q > q
and a1 ; a2 > 0, we have d 1 q† < 0 so p_ < 0; and since p > p and b1 ; b2 > 0

12
See Friedman (1991) for more general de®nitions.
On economic applications of evolutionary game theory 37

we have d 2 p† < 0 so q_ < 0 for any admissible dynamic. Conditions (i) and
(iii) of admissibility then imply that the trajectory must either leave this
quadrant in ®nite time or converge to its SW corner p ; q †. Similarly13, a
trajectory starting in the SW corner must either leave the quadrant in ®nite
time or converge to p ; q †. On the other hand, trajectories starting in the
SE quadrant have p_ > 0 (since q < q † and q_ < 0 for any admissible dy-
namic. Hence such trajectories cannot leave the quadrant. For N any
neighborhood of (1,0) in the square p_ and q_ are bounded away from zero
outside of N and therefore must enter N in ®nite time. Hence (1,0) is an EE
for any admissible dynamic F. The same argument establishes that the NW
quadrant is contained in the basin of attraction for the EE at (0, 1). The
case 1 ) 1 characterization in the text is completed by noting that the sets of
points which leave the NE and SW quadrants are disjoint and separated by
the saddle path to p ; q †.
The argument for the case 2 ) 2 characterization is analogous.
Straightforward sign checks on d i show that admissible trajectories in the
SE and NW quadrants relative to p ; q † consist of a saddlepath separating
trajectories that leave these quadrants, and that the NW and SE quadrants
lie respectively in the basins of attraction for the EE (1,1) and (0,0).
Cases 1 2 and 2 1 do not permit such de®nite conclusions. In case
1 2 we have p_ < 0 and q_ > 0 in the NE quadrant. A trajectory beginning
in this quadrant must leave in ®nite time and enter the NW quadrant, since
p_ can be bounded away from zero along the trajectory. For analogous
reasons, trajectories beginning in the NW quadrant must exit it in ®nite time
for the SW quadrant, hence to the SE quadrant and back to the NE
quadrant. A straightforward partition-of-unity construction as in Friedman
(1991, p. 664) demonstrates admissible dynamics for which p ; q † is the
global EE and other admissible dynamics for which all trajectories diverge
from p ; q †. This completes the ``asymmetric'' case characterization.
Next consider the more general linear case with C; D 6ˆ 0††. Now
d 1 p; q† is a general linear function whose slope coecient for p depends
on cij in the same fashion as its q-coecient depends on aij ; similarly for
d 2 p; q†. NE (and hence EE ) can occur only at intersections of the edges of
the square and the lines ‰d i p; q† ˆ 0Š. Intersections at the edges and corners
can be analyzed using the one-dimensional state space classi®cation. In-
tersections of the lines in the interior of the square are automatically NE for
the same reason as in the asymmetric case. Unfortunately the elementary
sign-checking procedures are insucient to characterize stability because
the lines are not generally vertical or horizontal.
To characterize the stability of an interior NE p ; q †, use standard ei-
genvalue techniques. Any admissible dynamic evaluated at this point can be
written p_ ˆ ad 1 p; q† and q_ ˆ bd 2 p; q† for some a; b > 0 by admissibility
properties (i) and (iii). Then the Jacobian matrix is

13
A note for the technically-minded reader. Condition (i) is used to bound p_ or q†_ away
from zero outside of a neighborhood of the line q ˆ q (or p ˆ p †, to ensure exit in ®nite
time when not on the saddle path.
38 D. Friedman

   
@F 1 =@p @F 1 =@q a c 1 ‡ c2 † a a1 ‡ a2 †
Jˆ ˆ :
@F 2 =@p @F 2 =@q b b 1 ‡ b2 † b d1 ‡ d2 †
The characteristic roots (eigenvalues) are the solutions k1 ; k2 to the equation
j J kI j ˆ 0. By appropriate choice of the A, B, C and D matrices and the a
and b coecients one can get any desired real or complex-conjugate values
for the ki and therefore every sort of stability behavior14. The two generic
possibilities not yet encountered are ki both real and positive (e.g. A ˆ B ˆ
((0)) and ci ; di > 0), and ki both real and negative. In the ®rst case, standard
techniques show that p ; q † is a source ± all trajectories beginning near it
move away, and that it is a sink (EE ) in the second case. See Hirsch and
Smale (1974), for example, for the well-known but non-elementary analysis.
Some elaboration of this point may prevent confusion. Recall that the
sum of the eigenvalues is the trace of the Jacobian matrix J and the product
is the determinant of J. When det J is negative ± i.e. when cd < ab where
x ˆ x1 ‡ x2 for x ˆ a; b; c; d ± then all compatible dynamics produce saddles.
When the determinant is positive and c and d are both positive, then
tr J ˆ ac ‡ bd† < 0 for all compatible dynamics a; b > 0† so any inte-
rior NE is always an EE ± it is either a sink or a stable center. Likewise,
when c and d are both negative we have tr J > 0, so (when the determinant
is positive) any interior NE must be unstable (a source or an unstable
center). When c and d di€er in their signs and the determinant is positive we
have a generalization of the center case ± the sign of tr J is not determined
and careful choice of compatible dynamics can produce sinks and sources
as well as stable or unstable centers. As an example of this generalized
center, choose matrices so that a ˆ c ˆ d ˆ 1 and b ˆ 0. Then it is easy
to verify that an interior NE is a source for a ˆ b 1 ˆ 0:1, a sink for
a ˆ b 1 ˆ 10 and a neutral center for a ˆ b ˆ 1.
Analysis of linear games on the triangle K ˆ 1; N1 ˆ 3† involves a 3  3
matrix A specifying the ®tness function f r; s† ˆ rT As. Writing
s ˆ p; q; 1 p q† and r ˆ x; y; 1 x y†, one can tediously derive a
2 ´ 2 matrix B s.t. f r x; y†; s p; q†† ˆ x; y†B p; q†T , where the components
bij are linear combinations of the aij . The three lines d ij p; q† 
f ei ej ; s p; q†† ˆ 0 de®ne indi€erence between each pair i 6ˆ j of the three
strategies. Intersections of the edges p ˆ 0; q ˆ 0 and p ‡ q ˆ 1† and
these lines contain the NE. Again analysis of the stability status on edges
reduces to the one-dimensional cases. Analysis of interior NE (intersec-
tions of two of the lines implies a 3-way intersection) again reduces to
®nding eigenvalues of the Jacobian matrix. The matrix components come
directly from A (via B) when replicator or linear dynamics are assumed (see
Taylor and Jonker, 1978, for example). Allowing more general compatible
dynamics only increases the degrees of freedom. Therefore any interior NE

14
The reader can verify that when C ˆ D ˆ 0††, the characteristic equation is of the
form k2 ˆ c. Hence when c > 0 the roots are real and of opposite sign (yielding a saddle)
and when c < 0 the roots are purely imaginary (yielding a center). Thus eigenvalue
techniques lead to the same conclusions as the elementary analysis of the ``asymmetric''
case.
On economic applications of evolutionary game theory 39

stability properties desired ± center, source, sink or saddle ± can arise by

suitable choice of A.
This Appendix has been explicit only for linear ®tness functions. Non-
linearities already are allowed for in the dynamics, so not much needs to be
changed for non-linear ®tness functions. The main possibility is that there
may be several interior intersections of the d i ˆ 0 lines, so the arguments
apply locally, not necessarily globally (see Hirsch and Smale, 1974, for
general techniques for local characterizations in terms of linearizations).

Appendix B: Models of adjustment dynamics

This Appendix discusses a sample of the burgeoning literature on dynam-

ical models of learning and evolution. The sample is far from complete but
it gives an impression of the variety of recent learning models (see the
September 1996 issue of Economic Journal for more systematic surveys).
The oldest dynamic speci®cation, going back at least to Cournot, is that
players make a best response to the current state. Such dynamics can be
written as s_ ˆ F s†  a B s† s†, where B is (a selection from) the best
reply (correspondence) and a > 0 is an adjustment rate parameter. The
best-response assumption (here and below) is rather strong in applications
where players can't see the entire distribution of play in the population (see
Gilboa and Matsui, 1991, for a theoretical example of Cournot dynamics;
see Fudenberg and Levine, 1997, for a thorough theoretical treatment).
Perhaps the next oldest dynamical scheme is ®ctitious play (Brown,
1951), associated with the individualistic interpretation of S. Here a state
s 2 S represents not the fractions of populations currently choosing each
action ± since there is only one player in each population, the fractions are
trivially 0 or 1 ± but rather the subjective beliefs of players about other
players' possible actions. Usually it is applied to 2-player games; for more
players one needs further strong assumptions e.g., that each pair of players
share the same beliefs regarding third parties. Players observe other players'
actions each period and consider these observations as independent iden-
tically distributed samples from ``Nature's''
P true distribution. This (mis-
speci®ed) model yields beliefs s t† ˆ t 1 tu ˆ 1 a u†, where a u† is the dis-
crete-time action pro®le at a previous dates u < t. Assuming players chose
their expected best response, we have a t ‡ 1† ˆ B s t††, so the di€erence
t 1
equation s t ‡1† ˆ t‡1 s t† ‡ t‡1 B s t†† characterizes discrete-time ®ctitious
play dynamics. The continuous-time analogue is the ordinary di€erential
15

equation s_ ˆ at B s† s†, where at is proportional to t 1 [see Wittman et al.

(1996) for an application, Cheung and Friedman (1997) for some labora-
tory evidence, and again see Fudenberg and Levine (1997) for a thorough
theoretical treatment].
It turns out that ®ctitious play dynamics converges (albeit slowly) in a
wide class of simple games, and, when convergent, always converges to a

15
Note that the action pro®le a(t) can take occasional large jumps. In ®ctitious play
dynamics one generally gets s_ ! 0 as t ! 1 so inertia holds with respect to beliefs rather
than actions.
40 D. Friedman

NE. Shapley (1964) provided a ®rst example of non-convergence. The in-

herent mis-speci®cation ± action pro®les are neither independent nor id-
entically distributed except (trivially) at NE ± together with Shapley's
example inhibited work with ®ctitious play dynamics for more than
20 years. Recently, however, many variants have appeared. Milgrom and
Roberts (1991) keep the same general schema (beliefs ! actions ! new
beliefs) but loosen it considerably. They obtain convergence to a subset of
states which contains Nash equilibria but not necessarily convergence to
any particular NE. They point to applications in industrial organization
and other ®elds. Fudenberg and Kreps (1988, 1993) also loosen the schema
somewhat and introduce active learning ± players may occasionally ``ex-
periment'' with a strategy which is not currently an expected best response
in order to learn more about their opportunities. Thus learning in part is an
active investment.
Another variant on ®ctitious play is least-squares (LS) learning, popular
in the macroeconomics literature following Marcet and Sargent (1989). The
objects of LS learning are unknown parameters of a macroeconomic model,
but the updating scheme, inherent misspeci®cation, and convergence
properties are essentially the same as for ®ctitious play.
Other individualistic discrete-time learning models include Selten
(1991a), Kalai and Lehrer (1990) and Jordan (1991). Selten's ``anticipatory''
dynamics are discussed at the end of section 3B. Kalai and Lehrer allow full
rationality in a repeated game setting. They obtain convergence to a NE (of
the repeated game) when players actively try to learn each other's repeated
game strategies and begin with suciently broad prior beliefs. Jordan ob-
tains convergence to a stage game NE when myopically rational players
(endowed with a common prior over possible payo€ functions) learn the
realized game by observing play. The convergence rate is exponential,
rather than O t 1 † as in most other individualistic learning models.
The population learning models vary considerably in the degree of ra-
tionality assumed. Crawford (1989) assumes individual-speci®c replicator
dynamics for learning and obtains non-convergence. Foster and Young
(1990) and Arthur (1989) take stochastic versions of the replicator and
obtain convergence to NE. Canning (1990) allows traders Bayesian ratio-
nality (with respect to the mis-speci®ed stationary model) or more general
updating functions; a little randomization (interpreted as deaths and births)
ensures convergence to NE. Matsui and Matsuyama (1991) produce a ra-
tional expectations evolutionary model by assuming large numbers of
players who can switch strategies only when exogenous, randomly timed
(Poisson) opportunities arrive. Players each maximize the expected present
value of the payo€ stream, know the model parameters and have perfect
foresight. In the limit, as switching opportunities become more frequent,
behavior converges globally to the risk dominant NE in 2 ´ 2 coordination
games. Multiple equilibria are possible for more general stage games.
Most but not all of the evolutionary models proposed so far satisfy the
weak compatibility condition (d) of section 2C. This condition (but not
necessarily the monotone version (b) or the sign preserving version (c))
automatically holds for the best-reply and ®ctitious-play type dynamics.
On economic applications of evolutionary game theory 41

Sometimes it fails for forward-looking rational dynamics, e.g. for initial

segments of Matsui and Matsuyama or Jordan paths.

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