Outline

Assignments
Elements of non-cooperative game theory.
Preference, utility, actions, strategies.

Normal Form games.

Identifying Nash Equilibria Domination Mixed Strategies

The Growing Family of Equilibrium Concepts

2003 Arthur Lupia

Hypothesis
Analysis of a political situation requires a specification of:
a list of the relevant decision makers the goals of these decision makers the actions/strategies available to each decision maker a list of feasible outcomes the relationship between actions and outcomes the relationships between outcomes and individual goals individual perception (information)
2003 Arthur Lupia

Components of a Game
players actions strategies information outcomes payoffs Equilibrium concept
2003 Arthur Lupia

Game Theory Fundamentals

Player goals are represented by utility functions with utility defined over outcomes.
Actions and Strategies
A strategy is a plan of action. In games that can be modeled as if they are simultaneous, actions and strategies are equivalent. In other games, strategies and actions are quite different with strategies being the primary choice of interest.

The combination of actions by all players determines a payoff for each player.
2003 Arthur Lupia

Preference and Utility

Utility function. u: X . x R y u(x) u(y)
Let x m. Let R be complete, reflexive and transitive. IF R(x) and R-1(X) are closed for all x X, then there exists a continuous function u which represents R. Increasing in restrictiveness: (how much you have to know about the person to render the description). binary relation Ordinal utility. Cardinal utility requires more data.
2003 Arthur Lupia

Nash Equilibrium
For an equilibrium prediction to be correct, it is necessary that each player be willing to choose the strategy described in the equilibrium.
Equilibrium represents the outcome of mutual and joint adaptation to shared circumstances. If the theory offers strategies that are not a Nash equilibrium, then at least one player will have an incentive to deviate from the theorys prediction, so the theory will be falsified by the actual play of the game.

2003 Arthur Lupia

Example 1: A game with a dominated strategy. Left Right

Top

8, 10

-100, 9

Bottom

7, 6

6, 5

Example 2: A more complicated game: with dominated strategies. Left Middle Right

Top

4, 3

5, 1

6, 2

Middle

2, 1

8, 4

3, 6

Bottom

3, 0

9, 6

2, 8

2003 Arthur Lupia

A normal form game

By convention, the payoff to the so-called row player is the first payoff given, followed by the payoff to the column player.
Study Loaf

Study Graduate School Loaf

100,100

50,0

0, 50

-10, -10

2003 Arthur Lupia

Practical Description
The normal form representation of a game specifies:
The players in the game. The strategies available to each player. The payoff received by each player for each combination of strategies that could be chosen by the players.

Actions are modeled as if they are chosen simultaneously.

The players need not really choose simultaneously, it is sufficient that they act without knowing each others choices.

2003 Arthur Lupia

Components of a Normal Form Game

Players Actions Strategies. Information. Outcomes. Payoffs. Equilibrium concept. A small number. Define columns and rows. Define columns and rows. Complete. Represented by vectors in cells. Elements of the vectors. Nash.

2003 Arthur Lupia

Technical Definition
1 to n: players in an n-player game. Si: player is strategy set. Si: an arbitrary element of Si. ui(si): player is payoff function.

Definition: The normal-form representation of an n-player game specifies the players strategy spaces S1,,Sn and their payoff functions u1,,un. We denote the game by G={S1,Sn;u1,un}.
2003 Arthur Lupia

Technical Definition
In the n-player normal-form game G={S1,Sn; u1,un}, the strategies (s1*,sn*) are a Nash equilibrium if, for each player i,
s*i is (at least tied for) player is best response to the strategies specified for the n-1 other players, (s*1,s*i-1, s*i+1,s*n): ui(s*1,s*i-1,s*i, s*i+1,s*n) ui(s*1,s*i-1, si, s*i+1,s*n) for every feasible strategy si in Si; that is, s*i solves max si Si ui(s*1,s*i-1, si, s*i+1,s*n).

If the situation is modeled accurately, NE represent social outcomes that are self-enforcing. Any outcome that is not a NE can be accomplished only by application of an external mechanism.
2003 Arthur Lupia

Ways to identify NE in order of ease.

Rule: As the level of conflict increases, so does the work required to derive a solution.
Identify pairs of dominant strategies. Eliminate dominated strategies.

Identify stable pairs of pure strategies.

Identify stable pairs of mixed (probabilistic) strategies.
2003 Arthur Lupia

Strictly dominated
In the normal-form game G={S1,Sn; u1,un}, let si and si be feasible strategies for player i (i.e., si and si are members of Si). Strategy si is strictly dominated by strategy si if
for each feasible combination of the other players strategies, is payoff from playing si is strictly less than is payoff from playing si: ui(s1,si-1, si, si+1,sn) < ui(s1,si-1, si, si+1,sn) for each (s1,si-1, si+1,sn) that can be constructed from the other players; strategy spaces S1,Si-1, Si+1,Sn.

2003 Arthur Lupia

Elimination of dominated strategies

Left Middle Right Up 1,0 1,2 0,1

Down

0,3

0,1

2,0

Figure 1.1.1. Iterated domination produces a solution. Left Middle Right

Top

0,4

4,0

5,3

Middle

4,0

0,4

5,3

Bottom

3,5

3,5

6,6

2003 Arthur Lupia

Figure 1.1.4. Iterated elimination produces no solution.

Requirements for Iterated Domination

o If we want to be able to apply the process for an arbitrary number of steps, we need to assume that it is common knowledge that the players are rational. o We need to assume not only that all the players are rational, but also that all the players know that all the players are rational, and that all the players know that all the players know that all the players are rational, and so on, ad infinitum.
o In the many cases where there is no or few strictly dominated strategies, the process produces very imprecise 2003 Arthur Lupia predictions.

NE: Fun facts

If iterated elimination of dominated strategies eliminates all but one strategy for each player, then these strategies are the unique NE.
There can be strategies that survive iterated elimination of strictly dominated strategies but are not part of any Nash equilibrium. If most models are to produce a unique solution, the solution must be a Nash equilibrium. A game can have multiple Nash equilibria. The precision of its predictive power at such moments lessens.
2003 Arthur Lupia

Left

Middle

Right

Top

0,4

4,0

5,3

Middle

4,0

0,4

5,3

Bottom

3,5

3,5

6,6

Figure 1.1.5. Iterated elimination produced no solution. Find the Nash Equilibrium.

Opera

Fight

Opera

2,1

0,0

Fight

0,0

1,2

Battle of the Sexes

2003 Arthur Lupia

Solving for MS-NE

Row chooses top with probability p and bottom with probability 1-p. Column chooses left with probability q and right with probability 1-q.
Left Right

Top

4, -4

1, -1

Bottom

2, -2

3, -3

Players choose strategies to make the other indifferent.

4q+1(1-q)=2q+3(1-q) -4p-2(1-p)=-1p-3(1-p)

The MS-NE is: p=.25, q=.5.

The expected value of either Row strategy is 2.5 and of either Column strategy is 2.5 2003 Arthur Lupia

Mixed strategy NE
A mixed strategy Nash Equilibrium does not rely on an player flipping coins, rolling, dice or otherwise choosing a strategy at random.
Rather, we interpret player js mixed strategy as a statement of player is uncertainty about player js choice of a pure strategy. In games of pure conflict, where there is no pure strategy Nash equilibria, the mixed strategy equilibriums are chosen in a way to make the other player indifferent between all of their mixed strategies.
To do otherwise is to give others the ability to benefit at your expense. Information provided to another player that makes them better off makes you worse off.
2003 Arthur Lupia

Mixed Strategies
In the normal-form game G={S1,Sn; u1,un}, suppose Si = {si1,siK}. Then a mixed strategy for player i is a probability distribution pi=(pi1,pik), where 0pik 1 for k=1,,K and pi1++piK=1.
Left Top Middle Bottom 3, 0, 1, Right 0, 3, 1, Top Middle Bottom Left 3, 0, 2, Right 0, 3, 2, -

Figure 1.3.1. Bottom is strictly dominated by a mixed strategy.

Figure 1.3.2. Bottom is a best response to mixed strategies by the column player in which 1/3 < q < 2/3.

2003 Arthur Lupia

Technical Definition
Let vi(pi, p-i) be the expected payoff of mixed strategy pi to player i given that the other player chooses mixed strategy p-i. Then, in the two player normal-form game G={S1,Sn; u1,un}, the mixed strategies (p1*,pn*) are a Nash equilibrium if each players mixed strategy is
a best response to the other players mixed strategy: v1(p*1, p*2) v1(p1, p*2) for every probability distribution p1 over S1 and v2(p*1, p*2) v2(p*1, p2) for every probability distribution p2 over S2.
2003 Arthur Lupia

Halves

More for Me

Halves

150, 150

0, 0

More for you

125, 175

100, 200

Left

Right

Top

4, -4

1, -1

Bottom

2, -2

3, -3

Left

Right

Top

4, 1

1, 2

Bottom

2, 3

3, 6

2003 Arthur Lupia

The last word.

Theorem (Nash 1950): In the n-player normal-form game G={S1,Sn; u1,un}, if n is finite and Si is finite for every i then there exists at least one Nash Equilibrium, possibly involving mixed strategies.

2003 Arthur Lupia

Equilibrium Concepts
Move sequence: static complete incomplete dynamic complete
incomplete

Information: Appropriate Nash Equilibrium concept

Generic

Bayesian

Subgame perfect

Perfect Bayesian, sequential

What is the set of self enforcing best responses? The equilibrium concepts build upon those of simpler games. Each subsequent concept, while more complex, also allows more precise conclusions from increasingly complex situations

2003 Arthur Lupia