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Mixed Strategy Nash Equilibrium

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9 views9 pages

Mixed Strategy Nash Equilibrium

Uploaded by

JamesQuach
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Mixed Strategy Nash Equilibrium

In the Matching Pennies Game, one can try to outwit the


other player by guessing which strategy the other player
is more likely to choose.

player 2
 
player 1  1 −1 −1 1
 −1 1 1 −1

However, by choosing the mixed strategy ( 12  12 ), either


player can guarantee an expected payoff of zero, so no
rational player should be consistently outwitted.

Both players choosing the mixed strategy ( 12  12 ) is the


Mixed Strategy Nash Equilibrium of this game. Neither
player can increase his/her payoff by changing his/her
strategy.
Definition: A profile of mixed strategies,  = (1  ),
is a mixed strategy Nash equilibrium (MSNE) if

(  −) ≥ ( −)


for all  ∈  and all players .

Here is an important fact that will help us compute the


MSNE: It must put positive probability only on pure strate-
gies that are best responses to the other players’ mixed
strategies  −.

To see why, if   puts positive probability on pure strategy


0, but 0 is not a best response to  −, then whenever
the randomization calls for player  to choose 0, she
should instead choose a best response.

Put another way, each player must be indifferent be-


tween all of the pure strategies that she uses with positive
probability in the MSNE, and no other pure strategy can
be better.
The indifference condition can be used to compute the
MSNE for 2 × 2 games:

player 2
 
player 1  6 6 2 7
 7 2 0 0

In the Chicken Game, suppose player 1 chooses the mixed


strategy ( 1 − ) and player 2 chooses the mixed strat-
egy ( 1 − ).

Player 1 must receive the same payoff from  and . If


player 1 chooses  , his payoff is

6 + 2(1 − )
and if player 1 chooses , his payoff is

7 + 0(1 − )
Setting these payoffs equal to each other determines player
2’s MSNE mixing probability,  = 23 .
Similarly, player 2 must receive the same payoff from 
and . Setting these payoffs equal to each other deter-
mines player 1’s mixing probability,  = 23 .

Notice that each player’s mixing probability is determined


to make the other player indifferent between his two
choices. This can be unintuitive, as the following game
illustrates.

Example: A Simple Entry Game.

Two firms must choose whether or not to enter a market.


The fixed cost of entry for firm  is . Assume 1  1
and 2  1.

Monopoly revenues are 1, and duopoly revenues are 0.


(Note—We can think of a lone entrant setting the monopoly
price and if both firms enter, Bertrand competition leads
to a price equal to marginal production cost.)
firm 2
enter don’t enter
firm 1 enter −1 −2 1 − 1 0
don’t enter 0 1 − 2 0 0

To compute the mixed strategy Nash equilibrium, let 


denote the probability that firm  enters. If firm 1 enters,
its payoff is

2(−1) + (1 − 2)(1 − 1)

For firm 1 to be indifferent between entering and not,


both payoffs must be zero, yielding 2 = 1 − 1. Simi-
larly, 1 = 1 − 2.

Notice that the firm with the higher cost is more likely
to enter! Mixed strategy NE often yields unintuitive
results, because mixing probabilities must make the other
player(s) indifferent.
Imagine the game being played over and over again, with
a new pair of players each time. It is very plausible that
the play will evolve into the lower cost firm always enter-
ing and the other firm always staying out. This is a pure
strategy NE.

It is also plausible that play evolves into the higher cost


firm always entering and the lower cost firm being bullied
into staying out, and that is also a NE.

If the play does not settle down into one of these patterns,
then both entering and not entering must be seen as
rational options. The higher cost players must be entering
with greater frequency than the lower cost players. If the
lower cost players entered at least as often as the higher
cost players, then someone is not being rational: either
the higher cost players should not be entering at all, or
the lower cost players should always be entering.
For games bigger than 2 × 2, then finding the MSNE is
more complicated. You need to determine which strate-
gies are being played with positive probability and which
ones are not being played. Here is Figure 11.2 from
the text (also discussed in Chapter 7). Player 1 decides
whether to serve to the opponent’s forehand side, the
center (at the opponent’s body), or the opponent’s back-
hand side. Player 2 must decide whether to protect his
forehand, his center, or his backhand.

player 2
  
 0 5 2 3 2 3
player 1  2 3 0 5 3 2
 5 0 3 2 2 3

To find the MSNE (there are no pure strategy NE), first


note that player 1’s strategy,  , is dominated by a mix-
ture of  and  that puts very high probability on .
Thus,  is not rationalizable. Player 1 will be mixing
between  and .
player 2
  
 0 5 2 3 2 3
player 1  2 3 0 5 3 2
 5 0 3 2 2 3

Next, having eliminated player 1’s strategy  , player 2’s


strategy  is now dominated by , so player 2’s strategy
 is not rationalizable. Player 2 will be mixing between
 and .

We now know the MSNE is of the form 1 = (0  1−)


and 2 = (0  1 − ).

Player 1’s payoff from  is then 3(1 − ), and his payoff
from  is 3 + 2(1 − ). Equating and solving for , we
have  = 14 . Therefore,  2 = (0 14  34 ).

Player 2’s payoff from  is 5 + 2(1 − ), and his payoff


from  is 2 + 3(1 − ). Equating and solving for , we
have  = 14 . Therefore, 1 = (0 14  34 ).
Here is a corollary of Nash’s Theorem: Every finite game
(having a finite number of players and a finite set of
strategies for each player) has at least one Nash equi-
librium in pure or mixed strategies.

Note: If the game is not finite, there may be no NE.

Consider the following two player game

 = {1 2 3 } for  = 1 2.

(1 2) = 1 + 2 for  = 1 2.

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