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Lecture 6

Lecture 6

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Published by: Prashant Patel on Dec 06, 2012
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Lecture VI: Existence of Nash equilibrium
Markus M. M¨obiusMarch 3, 2003
Readings for this class: Osborne and Rubinstein, section 2.4and Fudenberg and Tirole, chapter 1.3
1 Nash’s Existence Theorem
When we introduced the notion of Nash equilibrium the idea was to comeup with a solution concept which is stronger than IDSDS. Today we showthat NE is not too strong in the sense that it guarantees the existence of atleast one mixed Nash equilibrium in most games (for sure in all finite games).This is reassuring because it tells that there is at least one way to play mostgames.
1
Let’s start by stating the main theorem we will prove:
Theorem 1
(Nash Existence)
Every finite strategic-form game has a mixed-strategy Nash equilibrium.
Many game theorists therefore regard the set of NE for this reason as thelower bound for the set of reasonably solution concept. A lot of research hasgone into refining the notion of NE in order to retain the existence resultbut get more precise predictions in games with multiple equilibria (such ascoordination games).However, we have already discussed games which are solvable by IDSDSand hence have a unique Nash equilibrium as well (for example, the twothirds of the average game), but subjects in an experiment will not followthose equilibrium prescription. Therefore, if we want to
describe 
and
predict 
the behavior of real-world people rather than come up with an explanation
1
Note, that a pure Nash equilibrium is a (degenerate) mixed equilibrium, too.
1
 
of how they
should 
play a game, then the notion of NE and even even IDSDScan be too restricting.Behavioral game theory has tried to weaken the joint assumptions of rationality and common knowledge in order to come up with better theoriesof how real people play real games. Anyone interested should take DavidLaibson’s course next year.Despite these reservation about Nash equilibrium it is still a very usefulbenchmark and a starting point for any game analysis.In the following we will go through three proofs of the Existence Theoremusing various levels of mathematical sophistication:
existence in 2
×
2 games using elementary techniques
existence in 2
×
2 games using a fixed point approach
general existence theorem in finite gamesYou are only required to understand the simplest approach. The rest is forthe intellectually curious.
2 Nash Existence in
2
×
2
Games
Let us consider the simple 2
×
2 game which we discussed in the previouslecture on mixed Nash equilibria:
DUL R1,1 0,40,2 2,1
We next draw the best-response curves of both players. Recall that player1’s strategy can be represented by a single number
α
such that
σ
1
=
αU 
+(1
α
)
D
while player 2’s strategy is
σ
2
=
βL
+ (1
β 
)
R
.2
 
Let’s find the best-response of player 2 to player 1 playing strategy
α
:
u
2
(
L,αU 
+ (1
α
)
D
) = 2
αu
2
(
R,αU 
+ (1
α
)
D
) = 1 + 3
α
(1)Therefore, player 2 will strictly prefer strategy
L
iff 2
α >
1 + 3
α
whichimplies
α <
14
. The best-response correspondence of player 2 is therefore:
BR
2
(
α
) =
1 if 
α <
14
[0
,
1] i
α
=
14
0 if 
α >
14
(2)We can similarly find the best-response correspondence of player 1:
BR
1
(
β 
) =
0 if 
β <
23
[0
,
1] i
β 
=
23
1 if 
β >
23
(3)We draw both best-response correspondences in a single graph (the graph isin color - so looking at it on the computer screen might help you):
αβ
1/4 12/31BR
2
(
α
) BR
1
(
β
)
We immediately see, that both correspondences intersect in the single point
α
=
14
and
β 
=
23
which is therefore the unique (mixed) Nash equilibrium of the game.3

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