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M2

The document discusses normal form games, specifically focusing on a simultaneous, single play game represented by a payoff matrix. It uses the example of two students, Lena and Sven, deciding whether to share notes for an exam, illustrating dominant and dominated strategies. The outcome reveals a dominant strategy equilibrium where both players choose not to share, resulting in a suboptimal payoff compared to the potential cooperative outcome of sharing notes.

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5 views

M2

The document discusses normal form games, specifically focusing on a simultaneous, single play game represented by a payoff matrix. It uses the example of two students, Lena and Sven, deciding whether to share notes for an exam, illustrating dominant and dominated strategies. The outcome reveals a dominant strategy equilibrium where both players choose not to share, resulting in a suboptimal payoff compared to the potential cooperative outcome of sharing notes.

Uploaded by

biggykhair
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Games

Learning Objective 17.2: Describe normal form games, and identify


optimal strategies and equilibrium outcomes in such games.

The most basic of games is the simultaneous, single play game. We can
represent such a game with a payoff matrix: a table that lists the players
of the game, their strategies, and the payoffs associated with every
possible strategy combination. We call games that can be represented
with a payoff matrix normal form games.

Let’s start with an example of a game between two friends, Lena and
Sven, who are competing to be the top student in a class. They have a
final exam approaching, and they are deciding whether they should be
cooperative and share notes or be uncooperative and keep their notes to
themselves. They won’t see each other at the end of the day, so they
each have to decide whether to leave notes for each other without
knowing what the other one has done. If they both share notes, they both
will get perfect scores. Their teacher gives a ten-point bonus to the top
exam score, but only if there is one exam better than the rest, so if they
both get top score, there is no bonus, and they both get 100 on their
exams. If they both don’t share, they won’t do as well, and they will both
receive a 95 on their exams. However, if one shares and the other
doesn’t, the one who shares will not benefit from the other’s notes and
will only get a 90, and the one who doesn’t share will benefit from the
other’s notes and get the top score and the bonus for a score of 110.

All of these facts are expressed in the payoff matrix in table 17.1. Since
this is a single-shot, simultaneous game, it is a normal form game, and we
can use a payoff matrix to describe it. There are two players: Lena and
Sven. There are two strategies available to each player. We will assume
common knowledge—they both know all this information about the game,
and they know that the other knows it, and they know that the other
knows that they know it, and so on.

Table 17.1 The valedictorian game

Note Strategy Sven’s Payoff Lena’s Payoff


Sven shares 90 110

Lena shares 110 90

Neither share 95 95

Both share 100 100

Ements: players, strategies, and payoffs.

It is now time to think about individual strategy choices. We will start by


examining the difference between dominant and dominated strategies. A
dominant strategy is a strategy for which the payoffs are always greater
than any other strategy no matter what the opponent does. A dominated
strategy is a strategy for which the payoffs are always lower than any
other strategy no matter what the opponent does. Predicting behavior in
games is achieved by understanding each rational player’s optimal
strategy, the one that leads to the highest payoff. Sometimes the optimal
strategy depends on the opponent’s strategy choice, but in the case of a
dominant strategy, it does not, and so it follows that a rational player will
always play a dominant strategy if one is available to them. It also follows
that a rational player will never play a dominated strategy. So we now
have our first two principles that can, in certain games, lead to a
prediction about the outcome.

Let’s look at the valedictorian game in table 17.1. Notice that for Lena,
she gets a higher payoff if she doesn’t share her notes no matter what
Sven does. If Sven shares his notes, she gets 110 if she doesn’t share
rather than 100 if she does. If Sven doesn’t share his notes, she gets 95 if
she doesn’t share and 90 if she does. It makes sense then that she will
never share her notes. Don’t share is a dominant strategy, so she will play
it. Share is a dominated strategy, so she will not play it. The same is true
for Sven, as the payoffs in this game happen to be completely
symmetrical, though they need not be in games. We can predict that both
players will choose to play their dominant strategies and that the outcome
of the game will be don’t share, don’t share—Lena chooses don’t share,
and Sven chooses don’t share—and they both get 95.

This outcome is known as a dominant strategy equilibrium (

S
E

), an equilibrium where each player plays their dominant strategy. This is


a very intuitive equilibrium concept and is the one used in situations
where all players have a dominant strategy. Unfortunately, many, or even
most, games do not have the feature that every player has a dominant
strategy. Let’s examine the DSE in this game. The most striking feature of
this outcome is that there is another outcome that both players would
voluntarily switch to: share, share. This outcome delivers 100 to each
player and is therefore more efficient in the Pareto sense—there is another
outcome where you could make one person better off without hurting
anyone else. Games with this feature are known as prisoner’s dilemma
games—the name comes from a classic game of cops and robbers, but
the general usage is for games that have this Pareto-suboptimal feature.

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