Nash equilibrium in pure strategies.

Best
response. Definition and property of Nash
equilibrium. Examples of equilibrium, focal
point
Logic
• Suppose that you have a strategy b that is dominated by another strategy, say a.
• Never a good idea to play b because no matter what the other player does,
you can always do better with a.
• Now suppose you actually have some idea about the other player’s intentions.
• In that case, you would choose a provided it does better than b given what the other
player is going to do.
• You don’t, need to know that a performs better than b against all strategies of the other
player
• You simply need to know that it performs better against the specific strategy of your
opponent.
• Indeed, a is called a best response against the other player’s known strategy if it does
better than any of your other strategies against this known strategy.
Nash equilibrium
• A Nash Equilibrium is a set of strategies that players
act out
• With the property that no player benefits from changing
their strategy.
• If any given player were told the strategies of all their
opponents, they still would choose to retain their
original strategy.
Mathematical Notation
• Let Si denote a set of strategies for the ith player
• S=S1.S2……Sn denote the set of strategy profiles.
• This means that the elements of S are all possible combinations of
individual strategies.
• Let fi(s) denote the payoff to player i when evaluated at strategy
profile s∊S
• note that the payoff to an individual player depends on the strategies
of the other players as well
Pure and mixed strategy
• An individual mixed strategies is a probability distribution on the set
of available strategies.
• Example, selecting one of “rock”, “paper”, or “scissors” uniformly at
• There can also be a choice of weighting so that strategies are picked
with different probabilities.
• A pure strategy is one that does not involve randomization at all,
instead choosing a particular strategy all of the time.
• A pure strategy is simply a special case of a mixed strategy, in which
one strategy is chosen 100% of the time.
Pure strategy Nash Equilibrium
• A pure strategy provides a complete definition of how a player will
play a game
• It determines the move a player will make for any situation
• A player’s strategy set is the set of available pure strategies

• Eg: Putting scissors every time

Mixed strategy Nash Equilibrium
• A mixed strategy is an assignment of a probability to each pure
strategy
• This allows a player to select a pure strategy randomly
• Every game with a finite number of players in which each can choose
from finitely many pure strategies has atleast one Nash equilibrium-
but it might be mixed
• Sometimes mixed strategies are very useful – when you don’t want
the other player to know what you will do (Eg: negotiations)
• At other times, mixed strategy even at nash equilibrium might be
terrible (Eg: friendships)
Mathematical notation
• A Nash equilibrium is a strategy profile s=(s1,s2,……,sn) with the property that

• fi(s)>=fi(s1,s2,….., ,……,sn) for all i, where ∊Si denotes a strategy other than si available to player i.

• In the event that this inequality is strict, that is, fi(s)>fi(s1,s2,….., ,……,sn)

• For all i, the profile s is called a strict Nash equilibrium

• Otherwise s is called a weak nash equilibrium.

• Nash's existence theorem guarantees that as long as Si is finite for all i and there are a finite
number of players, at least one Nash equilibrium exists (possibly involving mixed strategies).
Nash’s Existence Theorem
• Every game
• With a finite number of players
• In which each player can choose from finitely many pure strategies
• Has at least one Nash Equilibrium
Nash Parables
• Prescription for play: If this strategy vector is proposed to the players,
then it is a stable prescription in the sense that no one has an incentive to
play otherwise. By playing an alternative strategy, a player would
simply lower her payoffs.
• Preplay communication: that is, they could coordinate by meeting
before the game is actually played and discussing their options. Not
credible for the players to agree on anything that is not a Nash
equilibrium
• Rational introspection: each player could ask himself what he
expects will be the outcome to a game. Only time no player appears to
be making a mistake is when each is playing a best response
Examples: Battle of sexes
Husband\Wife Football Opera

Football 3,1 0,0

Opera 0,0 1,3

Nash equilibrium in Battle of Sexes
• Best response of husband if wife plays F is F
• Best response of husband if wife plays O is O
• Best response of wife if husband plays F is F
• Best response of wife if husband plays O is O
• So F,F and O,O are Nash equilibrium
Examples: Prisoners dilemma
In terms of utility

Prisoner 1\Prisoner 2 Confess Not Confess

Confess 0,0 7,2

Not Confess 2,7 5,5

• In the Prisoners’ Dilemma, we know that confess is a dominant
strategy.
• Same as saying that the best response to either strategy of the other
player is confess.
• The only Nash equilibrium of the Prisoners’ Dilemma game is
(confess, confess).
• This is the dominant strategy solution.
Bertrand Pricing
Firm 1\Firm 2 High Medium Low

High 6,6 0,10 0,8

Medium 10,0 5,5 0,8

Low 18,0 8,0 4,4

Nash equilibrium
• When Firm 2 takes H, Firm 1 takes L
• When Firm 2 takes M, Firm 1 takes L
• When Firm 2 takes L, Firm 1 takes L
• L is the best response of Firm 1
• Similarly for Firm 1 (identical)
• The only Nash equilibrium in this game is therefore (L,L).
• This is also the IEDS solution
Consider the Nash equilibrium of the
game
• There is a husband and wife
• They both hold important jobs where they are often
required to work late.
• Each have two strategies they can play, go home early
or go home late
• Decisions are made simultaneously (non-cooperative
game)
• A Nash equilibrium is a situation where no player can
pick an alternative strategy and be better off, if the
other players maintain their strategy.
Example
Husband/Wife Early Late

Early 3,3 1,2

Late 2,1 2,2

Solution
• There exist two Nash equilibria.
• First: both the husband and wife go home early
• Second: the husband and wife both go home late
• These are both Nash equilibria because in these two cases, neither
player can improve their payoff by changing their strategy.
Example
• There are two friends
• Each with two strategies: stay up late and work or go to sleep
• The work payoff is negative because working is not an enjoyable
activity, however, working is less of an annoyance when you are
working with friends.
• However, sleeping early is positive experience, where the payoff is
consistent regardless of what your friends select to do. The Nash
equilibrium is demonstrated in the diagram below.
Work or sleep?
Friend 1\Friend 2 Work Sleep

Work -2,-2 3,-4

Sleep -4,3 3,3

Solution
• One Nash equilibrium (Sleep, Sleep)
IEDS and Nash equilibrium
• According to game theory, the dominant strategy is the optimal move
for an individual regardless of how other players act.
• A Nash equilibrium describes the optimal state of the game where both
players make optimal moves but now consider the moves of their
opponent.
• Consider any game in which there is an outcome to IEDS.
• It must be the case that this outcome is a Nash equilibrium.
• However, not every Nash equilibrium can be obtained as the outcome
to IEDS.
Two Fingers Morra
• Two players
• Sum of the numbers should be odd or even
• Player A calls even
Two Fingers Morra
A\B 1 finger 2 fingers

1 finger 1,-1 -1,1

2 fingers -1,1 1,-1

Solution
• Multiple Nash Equilibrium
• If player B closes 1 finger, player A will choose 1 finger
• If player B chooses 2 fingers, player A will choose 2 fingers
• Similar logic goes for player B
• No pure strategy Nash equilibrium
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

Solution
• There are three equilibria:
• (1) Felix works 9 hours and Oscar works 3.
• (2) They both work 6 hours.
• (3) Felix works 3 hours and Oscar works 9
Rock Paper Scissors
No pure strategy Nash Equilibrium
A\B Rock Paper Scissors

Rock 0,0 -1,1 1,-1

Paper 1,-1 0,0 -1,1

Scissors -1,1 1,-1 0,0

Coordination Games
2 pure strategy Nash Equilibrium
A\B Right Left

Right 1st , 1st 2nd ,2nd

Left 2nd , 2nd 1st ,1st

Two-player coordinated game
1\2 7.30 10.30

7.30 1,1 0,0

10.30 0,0 0,0

Solution
Nash equilibria:
1. Player 1 opt 7.30 and player 2 opt 7.30
2. Player 1 opt 10.30 player 2 opt 10.30
Stag Hunt

Stag Rabbit

Stag 2,2 0,1

Rabbit 1,0 1,1

Solution
• 2 Nash equilibria
• Player 1 best response when player 2 chooses Stag is Stag
• Player 1 best response when player 2 chooses Rabbit is Rabbit
• Player 2 best response when player 1 chooses Stag is Stag
• Player 2 best response when player 1 chooses Rabbit is Rabbit
• So (Stag, Stag) and (Rabbit, Rabbit) are the Nash equilibria
Find the Nash Equilibrium
5,2 3,0 8,1 2,3
6,3 5,4 7,4 1,1
7,5 4,6 6,8 0,2
Solution
• 2 Nash equilibria
• (5,4) and (2,3)
No pure strategy Nash Equilibrium
2,1 1,2

1,2 2,1
Find the Nash Equilibrium
-1,2 -2,1 2,0 1,2

1,1 3,0 0,-3 -2,1

1,-2 3,0 1,2 0,3

3,0 2,2 -1,1 -1,1

Find the Nash Equilibrium
1,2 1,-2 1,1 0,3

2,1 0,0 -3,0 1,-2

3,-1 -2,1 2,1 2,2

2,1 2,2 1,-1 -1,1

Find the Nash Equilibrium
9,0 8,-1 7,-2

6,-3 5,-4 4,-5

3,-6 2,-7 1,-9

Find the Nash Equilibrium
0,5 2,3

4,1 1,4
Find the Nash Equilibrium
1,3 3,1

2,2 2,5
Find the Nash equilibrium
5,4 4,1

1,4 3,2

1,1 5,5
Pareto Efficiency
• Pareto efficiency: An outcome is pareto efficient if there is no other
outcome that makes at least one person better off without leaving
anyone worse off
• Pareto inefficiency: An outcome is pareto inefficient if there is another
outcome that leaves at least one person better off without making
anyone worse off
Which outcome is pareto efficient?
Stag Hare

Stag 3,3 0,2

Hare 2,0 1,1

Which outcomes are pareto
efficient?
Cooperate Defect

Cooperate 3,3 1,4

Defect 4,1 2,2

Find the Pareto optimal
2,3 1,5

2,2 0,3
Find the Pareto optimal
(1,2) (1,-2) (1,1) (0,3)

(2,1) (0,0) (-3,0) (1,-2)

(3,-1) (-2,1) (2,1) (2,2)

(2,1) (2,2) (1,-1) (-1,1)

Summary
• A strategy choice of player i is a best response to his opponents’
strategy choice if it yields him the highest payoff possible against
that choice.
• A strategy combination is a Nash equilibrium if each player’s strategy
choice is a best response against her opponents’ choices in that
combination.
• Nash equilibrium is the most popular solution concept in all of game
theory. It can be motivated in a variety of ways.
Summary
• Nash equilibrium has been used to explain observable behavior
patterns in day to day activities like among animals living in the wild.
• Any IEDS solution has to be a Nash equilibrium. However, there
may be Nash equilibria that are not IEDS solutions.
• The same thing is true of a dominant strategy solution; it must be a
Nash equilibrium, but the reverse implication need not hold.