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# Game Theory

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A. S. Shaja & K. Sudhakar Aerospace Engg. Dept, I.I.T. Bombay, Powai, Mumbai -76 shaja@aero.iitb.ac.in 1

Prisoners Dilemma
Two suspects are arrested for armed robbery.

If both silent, 1 year in prison If both confess, 5 years in prison If one confess and the other does not, the one who confess gets 0 years and the other gets 20 years

Prisoners Dilemma

## Movie & Cricket

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

What is a Game?
A game is a formal representation of a situation in which a number of individuals interact in setting of strategic interdependence Welfare of each individual depends not only on own actions, but also on the actions of other individuals Actions that are optimal for an individual may depend on expected actions of other players best response Description of a strategic interaction requires four components: The players who are involved in playing the game The rules available actions when moving The outcomes combinations of actions The payoffs preferences (or gain) of players over the possible outcomes

## Example of a Game Matching Pennies

The Players Two players that we will denote by 1 and 2 The Rules Each player simultaneously puts a penny down, either heads up (H) or tails up (T) The Outcomes (H,H), (H,T), (T,H), (T,T) The Payoffs Payoff is simply amount of money player profits (-1,1), (1,-1)

## Normal Form Representation

Set of n players Sets of strategies for each player

## Payoffs displayed as a matrix

Player strategy
H

H
(-1,1)

T
(1,-1)

(1,-1)

(-1,1)
Zero Sum Game

Prisoners Dilemma

Prisoners Dilemma
Prisoner2 Player strategy Confess 5,5 Remain Silent 0,20

Prisoner1

Confess

Remain Silent

20,0

1,1

## Movie & Cricket

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

## Movie & Cricket

Husband Player strategy Movie 2,1 Cricket 0,0

Wife

Movie

Cricket

0,0

1,2

Equilibirium
Definition of a equilibrium: A situation where no player can improve his payoff by unilaterally changing his strategy Pure strategies : Players only play a single strategy in equilibrium

Game Theory

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (3, 2)

Game Theory
What is the optimal strategy for Firm A if Firm B chooses to advertise?
If Firm A chooses to advertise, the payoff is 4. Otherwise, the payoff is 2. The optimal strategy is to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (3, 2)

Game Theory
What is the optimal strategy for Firm A if Firm B chooses not to advertise?
If Firm A chooses to advertise, the payoff is 5. Otherwise, the payoff is 3. Again, the optimal strategy is to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (3, 2)

Game Theory
Regardless of what Firm B decides to do, the optimal strategy for Firm A is to advertise. The dominant strategy for Firm A is to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (3, 2)

Game Theory
What is the optimal strategy for Firm B if Firm A chooses to advertise?
If Firm B chooses to advertise, the payoff is 3. Otherwise, the payoff is 1. The optimal strategy is to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (3, 2)

Game Theory
What is the optimal strategy for Firm B if Firm A chooses not to advertise?
If Firm B chooses to advertise, the payoff is 5. Otherwise, the payoff is 2. Again, the optimal strategy is to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (3, 2)

Game Theory
Regardless of what Firm A decides to do, the optimal strategy for Firm B is to advertise. The dominant strategy for Firm B is to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (3, 2)

Game Theory
The dominant strategy for Firm A is to advertise and the dominant strategy for Firm B is to advertise. The equilibrium is for both firms to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (3, 2)

MinMax Theorem
For every two-person, zero-sum game with finitely many strategies, there exists a value V and a mixed strategy for each player, such that (a) Given player 2's strategy, the best payoff possible for player 1 is V, and (b) Given player 1's strategy, the best payoff possible for player 2 is V. Equivalently, Player 1's strategy guarantees him a payoff of V regardless of Player 2's strategy, and similarly Player 2 can guarantee himself a payoff of V. (c) The name minimax arises because each player minimizes the maximum payoff possible for the othersince the game is zerosum, he also minimizes his own maximum loss (i.e. maximize his minimum payoff).

Game Theory

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (6, 2)

Game Theory
What is the optimal strategy for Firm A if Firm B chooses to advertise?
If Firm A chooses to advertise, the payoff is 4. Otherwise, the payoff is 2. The optimal strategy is to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (6, 2)

Game Theory
What is the optimal strategy for Firm A if Firm B chooses not to advertise?
If Firm A chooses to advertise, the payoff is 5. Otherwise, the payoff is 6. In this case, the optimal strategy is not to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (6, 2)

Game Theory
The optimal strategy for Firm A depends on which strategy is chosen by Firms B. Firm A does not have a dominant strategy.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (6, 2)

Game Theory
What is the optimal strategy for Firm B if Firm A chooses to advertise?
If Firm B chooses to advertise, the payoff is 3. Otherwise, the payoff is 1. The optimal strategy is to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (6, 2)

Game Theory
What is the optimal strategy for Firm B if Firm A chooses not to advertise?
If Firm B chooses to advertise, the payoff is 5. Otherwise, the payoff is 2. Again, the optimal strategy is to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (6, 2)

Game Theory
Regardless of what Firm A decides to do, the optimal strategy for Firm B is to advertise. The dominant strategy for Firm B is to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (6, 2)

Game Theory
The dominant strategy for Firm B is to advertise. If Firm B chooses to advertise, then the optimal strategy for Firm A is to advertise. The Nash equilibrium is for both firms to advertise.

Firm A

## Firm B Advertise Don't Advertise (4, 3) (5, 1) (2, 5) (3, 2)

Prisoners Dilemma

Individual A

## Individual B Confess Don't Confess (5, 5) (0, 10) (10, 0) (1, 1)

Prisoners Dilemma
The prisoners dilemma is the historical game that founded game theory as a specific area of study:
This is because the solution to this game is sub-optimal from the point of view of the players. This means that there is a solution that makes both players better off, but the rationality of the agents does not lead to it.

The prisoners dilemma shows quite elegantly how difficult it is to get agents to cooperate, even when this cooperation is beneficial to all agents.

## Payoff Matrix Qd Firm A

Firm B Qd 2 2 15 0 Qc 0 15 10 10

Qc

## What is the Nash Equilibrium?

Is the Qd-Qd equilibrium a Nash equilibrium ? Can firm A or B improve their outcome by shifting alone to the cartel quantity Qc ? Qd-Qd is indeed a Nash equilibrium

## Payoff Matrix Qd Firm A

Firm B Qd 2 2 15 0 Qc 0 15 10 10

Qc

Mixed Strategy
A pure-strategy Nash equilibrium does not exist for all games

## Example of a penalty shoot-out:

2 players: a goal-keeper and a striker 2 strategies : shoot / dive to the left or the right We assume that the players are talented: The striker never misses and the goalkeeper always intercepts if they choose the correct side. This is not required for the game, but it simplifies things a bit!

## What is the payoff matrix?

Mixed Strategy
Payoff Matrix L Striker R Goalkeeper L 1 0 0 1 R 0 1 1 0
For the striker: R if the keeper goes L L if the keeper goes R For the goalkeeper: L if the striker shoots L R if the striker shoots R Whatever the outcome, one of the players can increase his sucess by changing strategy

## No pure-strategy Nash equilibrium !

Mixed Strategy
Payoff Matrix L Striker R Goalkeeper L R
There is, however, a mixed strategy equilibrium Strategy for both players:

1 0
0 1

0 1
1 0

Go L and R 50% of the time (1 out of two, randomly) That way : o Each outcome has a probability of 0.25 o The striker scores one out of two, the other is stopped by the goalkeeper

Mixed Strategy
Lets check that this is actually a Nash equilibrium:
The goalkeeper plays L and R 50% of the time. Can the striker increase his score by changing his strategy? The striker decides to play 60% left and 40% right. His new success rate is:

## (0.6 0.5) + (0.4 0.5) = 0.5 (0.3) + (0.2) = 0.5

By choosing 60-40, the striker scores more on the left hand side, but less on the right. His success rate is the same, his situation has not improved. This corresponds to a Nash equilibrium !

Nash Equilibirium
Definition of a equilibrium: A situation where no player can improve his payoff by unilaterally changing his strategy Central properties: Every game has at least one Nash equilibrium: Either in pure strategies : Players only play a single strategy in equilibrium Or in mixed strategies : Players play a combination of several strategies with a fixed probability The proof of this result is the main contribution of John Nash (and the reason why it is called a Nash equilibrium)

Types of games
Cooperative / Non-cooperative Simultaneous / Sequential Perfect / Imperfect information Finite / Infinitely long games Repeated games