Introduction to game

Basics of Game Theory. Classification of different types of the

Games. Concept of solution
Lets play rock paper scissors
• What will each individual guess about the others’ choices?
• What action will each person take?
• What is the outcome of these actions? Is this outcome good for the
group as a whole?
• Does it make any difference if the group interacts more than once?
• How do the answers change if each individual is unsure about the
characteristics of others in the group?
Examples of interdependence
• Bargaining in the market
• Voting in the parliament
• International Relations
• Wage setting
• Budget
• Dispute settlement
Basic Terminologies
• Game: A formal way to analyze interaction among a group of rational
agents who behave strategically.
• Interaction: What any one individual player does directly affects at
least one other player in the group.
• Strategic: An individual player accounts for this interdependence in
deciding what action to take.
• Rational: While accounting for this interdependence, each player
chooses her best action.
Examples from everyday life
Working on a group project

• Group: the students jointly working on the case

• Interaction: certain amount of work needs to get done
• Strategic play: involves estimating the likelihood of freeloaders in the
group,
• Rational play: requires a careful comparison of the benefits to a better
grade against the costs of the extra work.
• Discuss
Example from everyday life
Random drug testing (at the Olympics)

• Group: is made up of competitive athletes

and the International Olympic Committee (IOC).
• Interaction: between the athlete and with the IOC
• Rational Strategic: athletes to make decisions based on their chances
of winning and, if they dope, their chances of getting caught.
Similarly, it requires the IOC to determine drug testing procedures and
punishments on the basis of testing costs and the value of a clean-
whistle reputation.
Examples from Economics and Finance
R&D efforts by pharmaceutical companies

• Game: which product lines to invest research? how high to price a

new drug? how to reduce the risk associated with a new drug’s
development?
• Group: set of drug companies
• Interaction: arises because the first developer of a drug makes the
most profits
• Strategic and rational: if they are chosen to maximize the profits
from developing a new drug, given inferences about the competition’s
commitment to this line of drugs.
Examples from biology
Animal behavior

• Game: animals in the wild typically have to compete for scarce

resources (such as fertile females or the carcasses of dead animals)
• Group: all the animals that have an eye on the same prize(s).
• Interaction: because resources are limited
• Strategic: if they account for the behavior of competitors
• Rational: if they satisfy hunger or perpetuation of the species.
Examples from law
Bankruptcy law

• In the United States once a company declares bankruptcy its assets can
no longer be attached by individual creditors but instead are held in
safekeeping until such time as the company and its creditors reach
some understanding. However, creditors can move the courts to collect
payments before the bankruptcy declaration (although by doing so a
creditor may force the company into bankruptcy).
Examples from law
Bankruptcy law

• Group: creditors and bank

• Interaction: any money that an individual creditor can successfully
seize is money that becomes unavailable to everyone else.
• Strategic: estimation of how patient other creditors are going to be
• Rational choice: trade-off between collecting early and forcing an
unnecessary bankruptcy
What is not a game?

One case: your decisions affect no one but yourself.

Examples: whether or not to go jogging, how many movies to see this
week, and where to eat dinner.
Infinity case: your decisions do affect others, but there are so many
people involved that it is neither feasible nor sensible to keep track of
what each one does.
Examples: if you were to buy some stock it is best to imagine that your
purchase has left the large body of shareholders entirely unaffected.
Decision of a farmer on the price.
History of Game theory
• The pioneering analyses were those of the French economist Augustin
Cournot (in the year 1838) and the English economist Francis
Edgeworth (1881) (with subsequent advances due to Bertrand and
Stackelberg).
• Study of the game of chess by E. Zermelo in 1913.
• John von Neumann and Oskar Morgenstern titled “Theory of Games
& Economic Behavior” (1944): axiom-based foundation to utility
theory, optimal solutions to what are called zero-sum games (eg.
Election, budgeting), introduced cooperative games (eg. Student
teacher, cartel)
History of Game theory
• John Nash in 1950, introduced the equilibrium (or solution) concept
(Nobel Prize or Economics in 1994)
• Reinhard Selten generalized the idea of Nash equilibrium to dynamic
games, settings where play unfolds sequentially through time.
• In 1967–1968, Harsanyi generalized Nash’s ideas to settings in which
players have incomplete information about each others’ choices or
preferences.
Noble Laureates
• 1994: John Nash, Reinhard Selter, John Harsanyi
pioneering analysis of equilibria in the theory of non-cooperative games
• 2005: Tom Schelling and Robert Aumann
for enhancing our understanding of conflict and cooperation through
game theory understanding
• 2016: Oliver Hart and Bengt Holmstrom
contract theory
• 2020: Paul R. Milgrom and Robert B. Wilson
improvements to auction theory and inventions of new auction formats
Prisoner’s dilemma
Calvin\Klein Confess Not Confess

Confess 5,5 0,15

Not Confess 15,0 1,1

Prisoner’s Dilemma
• The best outcome is ( Not Confess, Not Confess)
• The problem is that if Calvin thinks that Klein is not going to confess,
he can walk free by ratting on Klein. Indeed, even if he thinks that
Klein is going to confess—the rat—Calvin had better confess to save
his skin.
• Surely the same logic runs through Klein’s mind.
• Consequently, they both end up confessing.
Applications of Prisoners Dilemma
• Two countries are in an arms race. Deciding whether to spend little or
large money on arms buildup.

• Two parties to a dispute (a divorce, labor settlement, etc.). Deciding

whether to bring in a lawyer.
Strategic Voting
• Two competing bills, designated here as A and B
• Three legislators, voters 1, 2 and 3,
• Two possible outcomes: either A or B gets passed, or the legislators
choose to pass neither bill (status quo).
• The voting proceeds as follows: first, bill A is pitted against bill B; the
winner of that contest is then pitted against the status quo (or N).
Strategic Voting
Voter 1 A N B

Voter 2 B A N

Voter 3 N A B
Strategic voting
• If the voters voted according to their preferences (i.e., truth-
fully) then A would win against B and then, in round two, would also
win against N.
• However, voter 3 would be very unhappy with this state of affairs; she
most prefers N and can in fact enforce that outcome by simply
switching her first round vote to B, which would then lose to N.
• Similarly, voter 2 can also switch her vote and get A elected
• So, in voting between A and B in the first round, they are
actually voting between A and N.
Some common games
Stag Hunt
• Two hunters go out to catch a meat
• There are two rabbits in the range and one stag. The hunters can each
bring the equipment necessary to catch one type of animal
• The stag has more meat than the rabbits combined, but both hunters
must chase the stag to catch it.
• Rabbit hunters can catch all of their prey by themselves.
Stag Hunt
Hunter 1/Hunter 2 Stag Rabbit

Stag 3,3 0,2

Rabbit 2,0 1,1

Chicken game
• two drivers drive toward each other on a collision course
• one must swerve, or both may die in the crash,
• but if one driver swerves and the other does not, the one who swerved
will be called a "chicken", meaning a coward;
Chicken game payoff
Straight Turn

Straight 0,0 4,1

Turn 1,4 3,3

Battle of Sexes
• A husband and a wife want to get together for an evening of
entertainment
• They can either go to the opera or the football
• The man prefers going to the football
• The woman prefers going to the opera
• They prefer being together than being alone
Battle of Sexes
Husband\Wife Football Opera

Football 3,1 0,0

Opera 0,0 1,3

Matching pennies
• You and your friend simultaneously reveal a penny
• If both pennies show heads or both show tails, player2 pays player1
Rs 1
• If one penny shows heads and the other shows tails, player1 pays
player2 Rs 1
Matching pennies
Heads Tails

Heads 1,-1 -1,1

Tails -1,1 1,-1

Concepts of Solution
• Game theory puts forward a number of solution concepts that are
typically intended to formulate some notion of rational choice in a
game-theoretic setting.
• A solution of a game is a set of the possible strategies and obtained
when the players act rationally and intelligently.
• A solution is an outcome from which no player wants to deviate
unilaterally.
Summary
• Game theory is a study of interdependence. It studies interaction
among a group of players who make rational choices based on a
strategic analysis of what others in the group might do.

• Game theory can be used to study problems as widely varying as the

use of natural resources, the election of a United Nations Secretary
General, animal behavior, and production strategies of OPEC.
Summary
• The foundations of game theory go back 150 years. The main
development of the subject is more recent, making game theory one of
the youngest disciplines within economics and mathematics.
• Strategic analysis of games such as Strategic voting and Prisoners’
Dilemma can expose the outcomes that will be reached by rational
players.
• These outcomes are not always desirable for the whole group of
players.
Classification of games
Non-Cooperative Games vs. Cooperative Games
• Non-cooperative game: if the players make decisions independently
and maximize their own utility.
Examples: prisoner’s dilemma and the battle of the sexes

• Cooperative games (also called coalition games): players make

binding commitments and find it beneficial to cooperate in the game
Examples: Cartel, group project
Static Games vs. Dynamic Games
• Static games (also called strategic, one-shot, single stage or simultaneous
games): all players make decisions (or select a strategy) simultaneously, without
knowledge of the strategies that are being chosen by other players.
Examples: Rock, paper, scissors, Stock market, College applications, Proposals,
Applications, Auctions (closed, sealed-bid), Voting, Battle, Invitations,
Examinations
• Dynamic games (also called sequential, extensive or repeated games): possible
orders of the events and players iteratively play a similar stage game
Examples: Carrom, Chess
Zero-Sum Games vs. Positive-Sum
Games
• Zero-sum games (special case of constant-sum games): If the total sum of all
players’ benefits is always zero for every combination of strategies. It means that
whatever gained by one player is lost by the other players.
Examples: Oil and gas licensing, Promotions, Budgeting, Real Estate Negotiations,
Politics-election, Bargaining, Contracts, Market share, Relative marking
• Positive-sum games: a gain by one player does not necessarily correspond with a
loss by another player.
Examples: Cooperation/Collusion, Cartels, Medical Records, Student/Professor
Discrete Games vs. Continuous Games
• Discrete games: that have a finite number of players, strategies and
outcomes.
Examples: cricket, carrom, Volleyball, firms choosing product to sell in
the market

• Continuous game: uses uncountably infinite continuous strategy set

Examples: Cournot competition game, trade war
n-Player Games vs. Population Games
• n-player games: Games with an arbitrary, but finite, n (n ≥1) number
of players
Example: cricket, football, hockey, table tennis
• Population games: are considered to involve a population of players
where strategy selections can change over time in response to the
decisions made by all individual players in the population.
Examples: Evolutionary games like cultural, biological, dealing with
Covid-19
Perfect Information Games vs.
Imperfect Information Games
• Perfect information game: if each player knows every strategy of the
other players that performed before that player at every point. The
players are fully informed about each other player’s strategy.
Examples: Card and chess games are well-known perfect
information games.
• Imperfect information games: strategic games do not know exactly
what strategies of other players took up to that point. In this case,
players have to infer from their likely strategies.
Examples: International relations, trade wars
Complete Information Games vs.
Incomplete Information Games
• Complete information game: is a game if all factors of the game are
common knowledge. Each player is aware of all other players and the
set of strategies and payoffs for each player.
Example: perfectly competitive market
• Incomplete Information game: at least one player is uncertain about
another player’s preferences.
Examples: sealed-bid auction
Difference between perfect and
complete information games
Perfect Information Games Complete Information games

Requires information Requires that every player

of the strategies taken by the know the strategies and
other players or payoffs available to the other
their sequence players but not necessarily the
actions taken
Pure Strategy Games vs.
Mixed Strategy Games
• Pure strategy game: provides a complete definition of how a player
will play a game. It determines the strategy that a player will make for
any game situation.
Examples: Prisoner’s dilemma

• Mixed strategy game: a strategy may be random, or drawn from a

probability distribution, which corresponds to how frequently each
strategy is to be played. Therefore, there are infinitely many mixed
strategies available to a player, even if their strategy set is finite.
Examples: Battle of Sexes, Rock paper scissors
Unitary Games vs. Hybrid Games
• Unitary Games: All the traditional games excluding hybrid games
can be called unitary games.
Examples: most of the traditional games
• Hybrid Games: Game designers try to mix two different type games
and propose a new hybrid game model, which contains cooperative
and non-cooperative features, simultaneously.
Examples: Diplomatic relations among the nations
Egalitarian Games vs. Hierarchical Games

• Egalitarian games: all the games with symmetric players

can be called egalitarian games (no hierarchical levels among
players).
Examples: carrom, chess
• Hierarchical games: include hierarchy concept in decision
making process, multiple levels of hierarchy with many
asymmetric players
Examples: Stackelberg games, bargaining power of the
workers
Symmetric Games vs. Asymmetric
Games
Symmetric games: if all players have the same strategy set, and the
payoff to playing a given strategy depends only on the strategies being
played, not on who plays them. Each player earns the same payoff when
the player selects the same strategy against similar strategy of his
competitors.
Examples: the prisoners’ dilemma, the battle of the sexes, the stag hunt
game and the chicken game.
Asymmetric games: are games where there are different strategy sets
for players.
Examples: Stackelberg game and the dictator game
Thank you