Game Theory and its Applications

SARANI SAHABHATTACHARYA, HSS ARNAB BHATTACHARYA, CSE 07 JAN, 2009

Prisoners Dilemma
2

Two suspects arrested for a crime Prisoners decide whether to confess or not to confess If both confess, both sentenced to 3 months of jail

If both do not confess, then both will be sentenced to

1 month of jail If one confesses and the other does not, then the confessor gets freed (0 months of jail) and the nonconfessor sentenced to 9 months of jail What should each prisoner do?
Game Theory

Jan 07, 2009

Battle of Sexes
3

A couple deciding how to spend the evening Wife would like to go for a movie Husband would like to go for a cricket match

Both however want to spend the time together

Scope for strategic interaction

Game Theory

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Games
4

Normal Form representation Payoff Matrix

Prisoner 2 Confess Prisoner 1 Confess Not Confess -3,-3 -9,0 Husband Movie Wife Movie Cricket 2,1 0,0 Cricket 0,0 1,2 Not Confess 0,-9 -1,-1

Game Theory

Jan 07, 2009

Nash equilibrium
5

Each players predicted strategy is the best response

to the predicted strategies of other players No incentive to deviate unilaterally Strategically stable or self-enforcing
Prisoner 2 Confess Prisoner 1 Confess Not Confess -3,-3 -9,0 Not Confess 0,-9 -1,-1

Game Theory

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Mixed strategies
6

A probability distribution over the pure strategies of

the game Rock-paper-scissors game

Each player simultaneously forms his or her hand into the shape of either a rock, a piece of paper, or a pair of scissors Rule: rock beats (breaks) scissors, scissors beats (cuts) paper, and paper beats (covers) rock

No pure strategy Nash equilibrium

One mixed strategy Nash equilibrium each player

plays rock, paper and scissors each with 1/3 probability

Game Theory

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Nashs Theorem
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Existence Any finite game will have at least one Nash equilibrium possibly involving mixed strategies

Finding a Nash equilibrium is not easy Not efficient from an algorithmic point of view

Game Theory

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Dynamic games
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Sequential moves One player moves Second player observes and then moves

Examples Industrial Organization a new entering firm in the market versus an incumbent firm; a leader-follower game in quantity competition Sequential bargaining game - two players bargain over the division of a pie of size 1 ; the players alternate in making offers Game Tree
Game Theory

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Game tree example: Bargaining

(x1,1-x1) 1 x1 Period 2: B offers x2. A responds. 1 x3

(x3,1-x3) 1

N B (0,0)

B
A

x2 A N

Y
0 Period 1: A offers x1. B responds.

0
(x2,1-x2)

0 Period 3: A offers x3. B responds.

Economic applications of game theory

The study of oligopolies (industries containing only

a few firms) The study of cartels, e.g., OPEC The study of externalities, e.g., using a common resource such as a fishery The study of military strategies The study of international negotiations Bargaining

Auctions
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Games of incomplete information

First Price Sealed Bid Auction Buyers simultaneously submit their bids Buyers valuations of the good unknown to each other Highest Bidder wins and gets the good at the amount he bid Nash Equilibrium: Each person would bid less than what the good is worth to you
Second Price Sealed Bid Auction Same rules Exception Winner pays the second highest bid and gets the good Nash equilibrium: Each person exactly bids the goods valuation
Game Theory

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Second-price auction
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Suppose you value an item at 100 You should bid 100 for the item If you bid 90 Someone bids more than 100: you lose anyway Someone bids less than 90: you win anyway and pay second-price Someone bids 95: you lose; you could have won by paying 95

If you bid 110 Someone bids more than 11o: you lose anyway Someone bids less than 100: you win anyway and pay second-price Someone bids 105: you win; but you pay 105, i.e., 5 more than what you value
Game Theory

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Mechanism design
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How to set up a game to achieve a certain outcome? Structure of the game Payoffs Players may have private information Example To design an efficient trade, i.e., an item is sold only when buyer values it as least as seller

Second-price (or second-bid) auction

Arrows impossibility theorem No social choice mechanism is desirable

Akin to algorithms in computer science

Game Theory

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Inefficiency of Nash equilibrium

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Can we quantify the inefficiency? Does restriction of player behaviors help? Distributed systems Does centralized servers help much? Price of anarchy Ratio of payoff of optimal outcome to that of worst possible Nash equilibrium In the Prisoners Dilemma example, it is 3

Game Theory

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Network example
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C(x) = 1 C(x) = x

Simple network from s to t with two links Delay (or cost) of transmission is C(x) Total amount of data to be transmitted is 1 Optimal: is sent through lower link Total cost = 3/4 Game theory solution (selfish routing) Each bit will be transmitted using the lower link Not optimal: total cost = 1 Price of anarchy is, therefore, 4/3
Game Theory

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Do high-speed links always help?

16
C(x) = x
C(x) = 1 C(x) = 1 C(x) = x

C(x) = x

C(x) = 1

C(x) = 0 C(x) = 1 C(x) = x

of the data will take route s-u-t, and s-v-t

Total delay is 3/2

Add another zero-delay link from u to v All data will now switch to s-u-v-t route

Total delay now becomes 2

Adding the link actually makes situation worse
Game Theory

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Other computer science applications

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Internet Routing Job scheduling

Competition in client-server systems

Peer-to-peer systems Cryptology Network security Sensor networks Game programming
Game Theory

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Bidding up to 50
Two-person game
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Start with a number from 1-4 You can add 1-4 to your opponents number and bid

that The first person to bid 50 (or more) wins Example

3, 5, 8, 12, 15, 19, 22, 25, 27, 30, 33, 34, 38, 40, 41, 43, 46, 50

Game theory tells us that person 2 always has a

winning strategy

Bid 5, 10, 15, , 50

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Easy to train a computer to win

Game Theory

Game programming
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Counting game does not depend on opponents choice

Tic-tac-toe, chess, etc. depend on opponents moves

You want a move that has the best chance of winning However, chances of winning depend on opponents

subsequent moves You choose a move where the worst-case winning chance (opponents best play) is the best: max-min Minmax principle says that this strategy is equal to opponents min-max strategy

The worse your opponents best move is, the better is your move
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Game Theory

Chess programming
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How to find the max-min move?

Evaluate all possible scenarios

For chess, number of such possibilities is enormous Beyond the reach of computers How to even systematically track all such moves? Game tree How to evaluate a move? Are two pawns better than a knight? Heuristics Approximate but reasonable answers Too much deep analysis may lead to defeat
Game Theory

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Conclusions
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Mimics most real-life situations well Solving may not be efficient Applications are in almost all fields

Big assumption: players being rational Can you think of unrational game theory?
Thank you!

Discussion

Game Theory

Jan 07, 2009