GAME THEORY

(CSI4006)

MODULE 5
BACH AND STRAVINSKY
Two people wish to go out together. Two concerts are available: one of music by
Bach, and one of music by Stravinsky. One person prefers Bach and the other prefers
Stravinsky. If they go to different concerts, each of them is equally unhappy listening
to the music of either composer.
BAYESIAN GAMES

In many situations the participants are not perfectly informed

about their opponents’ characteristics:
• bargainers may not know each others’ valuations of the object
of negotiation,
• firms may not know each others’ cost functions,
• combatants may not know each others’ strengths.
BAYESIAN GAMES

• Bayesian games generalize the notion of a strategic

game to allows us to analyze any situation in which each
player is imperfectly informed about some aspect of her
environment relevant to her choice of an action.
• A strategic game with imperfect information is called a
“Bayesian game”.
COMPONENTS OF BAYESIAN GAME

STRATEGIC GAME EXTENSIVE GAME BAYESIAN GAME

1. Players 1. Players 1. Players

2. Actions 2. Terminal History 2. States
3. Preferences 3. Player Function 3. Actions

4. Preferences 4. Signals
5. Beliefs
6. Payoffs
1. Players: The pair of people.
2. States: The set of states is {yy, yn, ny, nn}.
3. Actions: The set of actions of each player is {B,
S}.
4. Signals: Player 1 receives one of two signals,
y1 and n1; her signal function τ1 satisfies τ1(yy)
= τ1(yn) = y1 and τ1(ny) = τ1(nn) = n1. Player 2
receives one of two signals, y2 and n2; her
signal function τ2 satisfies τ2(yy) =τ2(ny) = y2
and τ2(yn) = τ2(nn) = n2.
5. Beliefs: Player 1 assigns probability 0.5 to
each of the states yy and yn after receiving
the signal y1 and probability 0.5 to each of the
states ny and nn after receiving the signal n1.
Player 2 assigns probability 2/3 to the state yy
and probability 1/3 to the state ny after
receiving the signal y2, and probability 2/3 to
the state yn and probability 1/3 to the state nn
after receiving the signal n2.
6. Payoffs: The payoffs ui(a, ω) of each player i
for all possible action pairs and states.
BACH AND STRAVINSKY
Player 1 is unsure whether player 2 prefers to go out with him/her or prefers to avoid
him/her.
Player 2, as before, knows player 1’s preferences.
Suppose player 1 thinks that with probability 0.5 player 2 wants to got out with her,
and with probability 0.5 player 2 wants to avoid her.
BAYESIAN GAME

• We treat the two types of player 2 as separate players.

• Analyze the situation as a three-player strategic game in which
player 1’s payoffs as a function of the actions of the two other
players (i.e. the two types of player 2).
• The payoff of each type of player 2 is independent of the actions
of the other type and depends on the action of player 1.
BAYESIAN GAME

• Neither player knows whether the other wants to go out with her.
• Specifically, suppose that player 1 thinks that with probability 0.5 player 2
wants to go out with her, and with probability 0.5 player 2 wants to avoid
her, and player 2 thinks that with probability 2/3 player 1 wants to go out
with her and with probability 1/3 player 1 wants to avoid her.
• 4 states - yy (each player wants to go out with the other), yn (player 1 wants
to go out with player 2, but player 2 wants to avoid player 1), ny (player 2
wants to go out with player 1, but player 1 wants to avoid player 2), and nn
(both want to avoid each other).
COMPONENTS OF BAYESIAN GAME

STRATEGIC GAME EXTENSIVE GAME BAYESIAN GAME

1. Players 1. Players 1. Players

2. Actions 2. Terminal History 2. States
3. Preferences 3. Player Function 3. Actions

4. Preferences 4. Signals
5. Beliefs
6. Payoffs
1. Players: The pair of people.
2. States: The set of states is {yy, yn, ny, nn}.
3. Actions: The set of actions of each player is {B,
S}.
4. Signals: Player 1 receives one of two signals,
y1 and n1; her signal function τ1 satisfies τ1(yy)
= τ1(yn) = y1 and τ1(ny) = τ1(nn) = n1. Player 2
receives one of two signals, y2 and n2; her
signal function τ2 satisfies τ2(yy) =τ2(ny) = y2
and τ2(yn) = τ2(nn) = n2.
5. Beliefs: Player 1 assigns probability 0.5 to
each of the states yy and yn after receiving
the signal y1 and probability 0.5 to each of the
states ny and nn after receiving the signal n1.
Player 2 assigns probability 2/3 to the state yy
and probability 1/3 to the state ny after
receiving the signal y2, and probability 2/3 to
the state yn and probability 1/3 to the state nn
after receiving the signal n2.
6. Payoffs: The payoffs ui(a, ω) of each player i
for all possible action pairs and states.
NASH EQUILIBRIUM
Player 1 is unsure whether player 2 prefers to go out with him/her or prefers to avoid
him/her.
Player 2, as before, knows player 1’s preferences.
Suppose player 1 thinks that with probability 0.5 player 2 wants to got out with her,
and with probability 0.5 player 2 wants to avoid her.
FIGHTING AN OPPONENT OF UNKNOWN
STRENGTH

Two people are involved in a dispute. Person 1 does not know whether person 2 is
strong or weak; she assigns probability 𝛼 to person 2’s being strong. Person 2 is fully
informed. Each person can either fight or yield. Each person’s preferences are
represented by the expected value of a payoff function that assigns the payoff of 0 if
she yields (regardless of the other person’s action) and a payoff of 1 if she fights and
her opponent yields; if both people fight, then their payoff are (-1, 1) if person 2 is
strong and (1, -1) if person 2 is weak. Formulate this situation as a Bayesian game.
FIGHTING AN OPPONENT OF UNKNOWN
STRENGTH
COURNOT’S MODEL WITH IMPERFECT
INFORMATION

Two firms compete in selling a good; one firm does not know the other firm’s
cost function. How does the imperfect information affect the firms’ behavior?
Assume that both firms can produce the good at constant unit cost. Assume
also that they both know that firm 1’s unit cost is c, but only firm 2 knows its
own unit cost; firm 1 believes that firm 2’s cost is cL with probability θ and cH
with probability 1 − θ, where 0 < θ < 1 and cL < cH.
1. Players: Firm 1 and firm 2.
2. States: {L, H}.
3. Actions: Each firm’s set of actions is the set of its possible outputs
(nonnegative numbers).
4. Signals: Firm 1’s signal function τ1 satisfies τ1(H) = τ2(L) (its signal is the
same in both states); firm 2’s signal function τ2 satisfies τ2(H) = τ2(L) (its
signal is perfectly informative of the state).
5. Beliefs: The single type of firm 1 assigns probability θ to state L and
probability 1 − θ to state H. Each type of firm 2 assigns probability 1 to the
single state consistent with its signal.
6. Payoff functions: The firms’ Bernoulli payoffs are their profits; if the
actions chosen are (q1, q2) and the state is I (either L or H) then firm 1’s
profit is q1(P(q1 + q2) − c) and firm 2’s profit is q2(P(q1 + q2) − cI ), where
P(q1 + q2) is the market price when the firms’ outputs are q1 and q2.
COURNOT’S MODEL WITH IMPERFECT
INFORMATION

Consider the game when the inverse demand function is given by P(Q) = α −
Q for Q ≤ α and P(Q) = 0 for Q > α. For values of cH and cL close enough that
there is a Nash equilibrium in which all outputs are positive, find this
equilibrium. Compare this equilibrium with the Nash equilibrium of the game
in which firm 1 knows that firm2’s unit cost is cL, and with the Nash
equilibrium of the game in which firm 1 knows that firm 2’s unit cost is cH.
COURNOT’S MODEL WITH IMPERFECT
INFORMATION

where Q = q1 + q2 is the total output in the market. The cost of firm 2 is c2(q2) = 9q2
with probability 1/3 and c2(q2) = 27q2 with probability 2/3. The cost of firm 1 is c1(q1)
= 18q1. Firm 2 knows its own cost, but firm 1 only knows the types of costs of firm 2
and its probabilities.