Game Theory
Introduction
Definition Game theory is a formal way
of representing and analysing interactive
situations.
interactive situations : situations where
several entities called players take
actions that affect each other.
Applications: Economics, Political
science, Biology, Computer Science
Players : living organisms, artificial
agents, ordinary human beings.
Game theory are concerned with the
interactive behaviour of rational man.
Rational man is one that always acts both
purposefully and logically, has well
defined goals, is motivated solely by the
desire to achieve these goals as closely
as possible and has the calculating ability
required to do so.
Cooperative game theory : assumes that players can
communicate,
form coalitions
sign binding agreements.
Non-cooperative game theory :
Assumes that players unable to
communicate
or
sign binding agreements
Games with ordinal payoffs : games where the players’
preferences over the possible outcomes are only specified in
terms of an ordinal ranking
(outcome o is better than outcome o’ or o is just as good as o’)
Ordinal Games in Strategic Form
Sarah is selfish and greedy :
Sarah is fair minded :
Game frame : we have no information about the preferences
of the players.
Game obtained from Game frame by adding preference of
players over outcomes.
Complete
Transitive
Ways of representing the ranking of outcomes
1.
2.
Utility function
Definition of Utility
Definition of a Game
Payoff and game in reduced form
is a game in reduced form
player 1
player 2
Assigned utility satisfying the ranking
Reduced form of the game
If player 1 is fair minded and benevolent
Strict and Weak Dominance
Strategy A strictly dominates strategy B
Strategy C strictly dominates strategy D
Strategy B weakly dominates strategy D
Notations
Definition
Example
Definitions
A and C are both weakly dominant strategies for player 1.
dominant strategy equilibrium
Example
Steal is a weakly dominant strategy for each player (left fig.)
(steal,steal) is a weakly dominant strategy equilibrium
Split is a strictly dominant strategy for player 1 where as, steal is
a weakly dominant strategy for player 2. (split,steal) is a weakly
dominant strategy equilibrium
Example
players are envious of each other
Pareto-superiority
In reduced form games
Outcome o1 is strictly Pareto superior to o4 or,
In terms of strategy profiles, (Normal effort, Normal effort) is
strictly Pareto superior to (Extra effort, Extra effort).
Second Price Auction
Two oil companies bid for the right to drill a field. The possible
bids are $10 million, $20 million, . . . , $50 million. In case of ties
the winner is Player 2
Oil field would generate a profit of $30 million
More than two bidders
Denote the possible outcomes as pairs (i , p), where i is the winner and p is the price
that the winner has to pay. In case of ties lowest indexed player wins.
denote by bi the bid of Player i
More than two sides
Ranking of outcomes
Utility function
Weak dominant strategy
Iterated deletion procedures (IDSDS)
(Iterative Deletion of Strictly Dominated Strategies)
IDWDS (Iterative Deletion of Weakly Dominant Strategies)
Another order gives different result
IDWDS Definition at every step identify, for every player, all the strategies
that are weakly (or strictly) dominated and then delete all such strategies in that step. If
the output of the IDWDS procedure is a single strategy profile then we call that strategy
profile the iterated weakly dominant-strategy equilibrium (otherwise we just use the
expression ‘output of the IDWDS procedure’)
Nash Equlibrium : IDSDS or IDWDS procedure may not result in a unique strategy
profile.
Nash Equilibrium: More general alternative
Nash Equilibrium for more than two players
Steps to get Nash equilibrium
3-player game
Properties of Nash Equilibrium
• No regret
Example
There are 50 players.
A benefactor asks them to simultaneously and secretly write on a piece of paper a
request, which must be a multiple of $10 up to a maximum of $100
The possible strategies of each player are $10;$20; : : : ;$90;$100).
If not more than 10% of the players ask for $100 then
he will grant every player’s request,
otherwise every player will get nothing.
Assume that every player is selfish and greedy (only cares about how much money
she gets and prefers more money to less).
What are the Nash equilibria of this game?
• Every strategy profile where 7 or more players request $100 is a Nash equilibrium
(everybody gets nothing and no player can get a positive amount by unilaterally
changing her request, since there will still be more than 10% requesting $100
• Every strategy profile where exactly 5 players request $100 and the remaining
players request $90 is a Nash equilibrium.
Matching Pennies Game (No Nash Equilibrium)
Simultaneous two-player game where each player has a coin and decides whether
to show the Heads face or the Tails face. If both choose H or both choose T then
Player 1 wins, otherwise Player 2 wins.
Each player strictly prefers the outcome where she herself wins to the alternative
outcome.
Games with infinite strategy sets
2-Player game for profit maxmization
Consider 2 firms which produce an identical product.
Let qi be the quantity produced by Firm i (i = 1,2).
For Firm i the cost of producing qi units of output is ciqi, where ci is a positive constant.
For simplicity we will restrict attention to the case where c 1 = c2 = c.
Let Q be total industry output, that is, Q = q1+q2. The price at which each firm can sell
each unit of output is given by the inverse demand function P = a-bQ where a and b are
positive constants.
Each firm was only interested in its own profit
and preferred higher profit to lower profit (that is, each firm is “selfish and greedy”).
