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

Jan 07, 2009

Games
4

Normal Form representation Payoff Matrix

Prisoner 2

Prisoner 1

Confess

Not Confess

Confess

-3,-3

0,-9

Not Confess

-9,0

-1,-1
Husband

Wife

Game Theory

Movie

Cricket

Movie

2,1

0,0

Cricket

0,0

1,2

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

Prisoner 1

Game Theory

Confess

Not Confess

Confess

-3,-3

0,-9

Not Confess

-9,0

-1,-1

Jan 07, 2009

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

Jan 07, 2009

Nashs Theorem
7

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

Jan 07, 2009

Dynamic games
8

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

Jan 07, 2009

Game tree example: Bargaining

Period 2:
B offers x2.
A responds.

(x1,1-x1)
1

(x3,1-x3)
1

x3

x1
B
A

0
Period 1:
A offers x1.
B responds.

N
B

x2 A

N
Y

(x2,1-x2)

0
Period 3:
A offers x3.
B responds.

(0,0)

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
11

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

Jan 07, 2009

Second-price auction
12

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

Jan 07, 2009

Mechanism design
13

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

Jan 07, 2009

Inefficiency of Nash equilibrium

14

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

Jan 07, 2009

Network example
15

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

Jan 07, 2009

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

Jan 07, 2009

Other computer science applications

17

Internet
Routing
Job scheduling
Competition in client-server systems
Peer-to-peer systems
Cryptology
Network security
Sensor networks
Game programming
Game Theory

Jan 07, 2009

Bidding up to 50
Two-person game

18

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

Easy to train a computer to win

Game Theory

Jan 07, 2009

Game programming
19

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

Game Theory

Jan 07, 2009

Chess programming
20

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

Jan 07, 2009

Conclusions
21

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