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Session 3

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ARYAMAN GUPTA
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25 views16 pages

Session 3

Uploaded by

ARYAMAN GUPTA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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A solution in the elimination

of dominated strategies
Iterated Elimination of Dominated Strategies
Player 1\ Player 2 Left Right

Up 1,1 0,1

Middle 0,2 1,0

Down 0,-1 0,0


Solving through IEDS
• For Player 1—the row player—neither of the first two strategies
dominate each other, but they both dominate Down.
• For the same reason that it is irrational for a player to play anything
but a dominant strategy (should there be any), it is also irrational
to playa dominated strategy.
• The reason is that by playing any strategy that dominates (this
dominated strategy) she can guarantee herself a payoff which is at
least as high, no matter what the other players do.
• Hence, the row player should never play Down but should
rather play either Up or Middle
Solving through IEDS
• What is interesting is that this logic could then set in motion a chain
reaction.
• In any game once it is known that player 1 will not play her bad strategies, the
other players might find that certain of their strategies are in fact dominated.
• This is because player 2, for instance, no longer has to worry about how his
strategies would perform against player 1’s dominated strategies.
• So some of player 2’s strategies, which are only good against player 1’s
dominated strategies, might in fact turn out to be bad strategies
themselves.
• Hence, player 2 will not play these strategies. This might lead to a third
round of discovery of bad strategies by some of the other players, and so on.
Dominance Solvable
• The strategy choice (Up, Left) is said to be reached by iterated
elimination of dominated strategies (IEDS)
• The game itself is said to be dominance solvable
• In any game, if we are able to reach a unique strategy vector by
following this procedure
• We call the outcome the solution to IEDS and call the game
dominance solvable
Bertrand Price Competition
Firm 1 \Firm 2 High Medium Low

High 6,6 0,10 0,8

Medium 10,0 5,5 0,8

Low 8,0 8,0 4,4


The odd Couple
• Felix and Oscar share an apartment.
• They have decidedly different views on cleanliness and, hence, on
whether or not they would be willing to put in the hours of work
necessary to clean the apartment.
• Suppose that it takes at least twelve hours of work (per week) to keep
the apartment clean, nine hours to make it livable, and anything less
than nine hours leaves the apartment filthy.
• Suppose that each person can devote either three, six, or nine hours to
cleaning.
The Odd Couple
• Felix and Oscar agree that a livable apartment is worth 2 on the utility
index.
• They disagree on the value of a clean apartment—Felix thinks it is worth
10 utility units, while Oscar thinks it is only worth 5.
• They also disagree on the unpleasantness of a filthy apartment—Felix
thinks it is worth −10 utility units, while Oscar thinks it is only
worth −5.
• Each person’s payoff is the utility from the apartment minus the number of
hours worked
• for example, a clean apartment on which he has worked six hours gives
Felix a payoff of 4, while it gives Oscar a payoff of −1.
The odd Couple
Felix\Oscar 3 hours 6 hours 9 hours
3 hours -13,-8 -1,-4 7,-4
6 hours -4,-1 4,-1 4,-4
9 hours 1,2 1,-1 1,-4
Advantages of IEDS
• Widely used in game theory and its applications.
• Simplicity of the dominance concept.
• If a player is convinced that one of his strategies always does worse
than some alternative strategy, then he will never use
it.
• It is also clear that other players should realize this and take this into
account in determining what they should do.
• Dominance solvability has a link with a solution concept used in the
extensive form called backwards induction.
Disadvantage of dominant strategy
Layers of rationality
• That no player will play a dominated strategy is a reasonable
assumption.
• That no player will play a strategy that is dominated once the others’
dominated strategies are eliminated also appears reasonable.
• That no player will play a strategy that becomes dominated only after fifteen
rounds of elimination of dominated strategies seems less reasonable.
• This is because it presumes that everybody agrees that every body else is
reasonable in this form over succeeding (fourteen) higher orders.
• This is especially problematic if a “mistake” about the other player’s
rationality can be costly.
Disadvantage of dominant strategy
Layers of rationality
1\2 Left Center Right

Top 4,5 1,6 5,6

Middle 3,5 2,5 5,4

Bottom 2,5 2,0 7,0


Disadvantages of the dominance solution
Order of elimination matters

1\2 Left Right

Top 0,0 0,1

Bottom 1,0 0,0


Disadvantages of Dominance
Strategy
• Nonexistence: Not all games are dominance solvable. For example, in
the Battle of the Sexes, matching pennies
Non-existence
1\2 Left Middle Bad

Top 1,-1 -1,1 0,-2

Middle -1,1 1,-1 0,-2

Bad -2,0 -2,0 -2,-2


Summary
• No rational player will play a dominated strategy but would rather
play one of his undominated strategies.
• A rational player would not expect his opponents to play a
dominated strategy either.
• Elimination of dominated strategies can lead to a chain reaction that
successively narrows down how a group of rational players will act.
• If there is eventually a unique prediction, it is called the IEDS solution.
• When there are many rounds of elimination involved in an IEDS
solution, there is reason to be concerned about the reasonableness
of its prediction.

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