EE 311 Microeconomics Theory: Chayun Tantivasadakarn and Thorn Pitidol

Game Theory
Fill in the payoff of each strategy, then see the result in the solution sheet.

Player B

Strategy 1 Strategy 2

Strategy 1 10 , 10 11 , 30
Player A
Strategy 2 5 , 10 1 , 30
Questions: Game Theory
Filling up the following pay-offs and analyze the situations.
1) Analyze the Nash Equilibrium of the following pay-off matrix, what is the characteristic of
the solution?
Player B
Strategy 1 Strategy 2
Strategy 1 -20 , -20 0, -50
Player A
Strategy 2 -50 , 0 -10 , -10
2) Analzye the Nash Equilibrium of the following pay-off matrix, what is the characteristic of
the solution?
Player B
Strategy 1 Strategy 2
Strategy 1 30 , 20 10 , 10
Player A
Strategy 2 10 , 10 20 , 30
3) Analzye the Elimination of Dominated Stategies Equilibrium of the following pay-off matrix,
what is the characteristic of the situation?
Player B
Strategy 1 Strategy 2
Strategy 1 0, 20 -10 , 10
Player A
Strategy 2 -50 , 0 20 , 10
4) Compare the Nash Equilibrium and Maximin Equilibrium of the following pay-off matrix.
Player B
Strategy 1 Strategy 2
Strategy 1 20 , 10 20 , 20
Player A
Strategy 2 -100 , 10 30 , 20
Nash Equilibrium and Maximin Equilibrium Sequential Game
Solutions: The solution is in the cell that has two highlights
Player B
Nash Equilibrium Sequential Game
Strategy 1 Strategy 2
Strategy 1 10 , 10 11 , 30 Strategy 1 10 , 10
Player A
Strategy 2 5 , 10 1 , 30 7
Strategy 1
The solution is in the cell that has two highlights Strategy 2 11 , 30
There may be no solution at all or more than one solutions 5
Strategy 1 5 , 10
Strategy 2
Player B 3
Maximin Equilibrium
Strategy 1 Strategy 2 Strategy 2
1 , 30
Strategy 1 10 , 10 11 , 30
Player A
Strategy 2 5 , 10 1 , 30

Elimination of Dominated Strategy Equilibrium

Player B
Dominant Strategies The row and/or collumn that has a blue highlight is a dominant strategy
Strategy 1 Strategy 2
Strategy 1 10 , 10 11 , 30 Solutions happen when there's a cell that has two highlight
Player A
Player A
Strategy 2 5 , 10 1 , 30 There may be no dominant strategy and no solution
Node A TNode B
A1 A1B1 A1B2
X Y X Y1 Y2
1 5 4 ### 7
4 7 7 ### 8
LNode B
A2 A2B1 A2B2
X Y X Y1 Y2
1 5 4 ### 3
4 3 7 ### 4
Game Theory by Thorn Pitidol
Game is a competing situation in which each player recognizes the mutual interdependence of their actions.

Components of Game
1) Players.
2) Rules that specify the strategies that each player can choose.
3) Pay -offs or the reward of the game.

There are many types of games, but the one that we will use to explain first, is the simultaneous and non-cooperative type of games
Which mean the pay-off matrix will be in the "normal form" which is as follows
Normal Form of Game
Player B
Strategy 1 Strategy 2
Strategy 1 0, 0 -10 , 10
Player A
Strategy 2 -50 , 0 20 , 10
In the "normal form" of game, the horizontal cell in the table specify the strategy of Player A
and the vertical cell specify the strategy of Player A.
The fist number in the pay-off specifies the pay-off for Player A and
the second number in the pay-off specifies the pay-off for Player B.

Eqilibrium of a game
Equilibrium of a game is a situation which determines the outcome of a games .
There are many type of equilibrium of a game, for example; Nash Equlibrium, Maximin Equilibrium which can be explain as follows:
Nash Equilibrium
Nash Equilibrium is a set of strategies such that each player is doing the best it can given the action of its opponents.

Procedure to attain a Nash Equilibrium:

1) Assume one strategy of the rival, then choose the highest pay-off and mark the pay-off.
2) Move to the next strategy of the rival and do process 1) again until all the strategies are exhausted.
3) Repeat process 1) and 2) for the rival.
4) The combination of strategies that both competitors chose together is (are) the equilibrium(brea) .

Example
Nash Equilibrium Player B
Strategy 1 Strategy 2
Strategy 1 0, 0 -10 , 10 Player A's highest pay-off = 0
Player A
Strategy 2 -50 , 0 20 , 10 Player A's highest pay-off = 20
Player B's highest pay-off = 0 Player B's highest pay-off =10 Nash's Equilibrium
Maximim Equilibrium
Maximim Equilibrium is a set of strategies which each players maximize the minimum gains that can be earned

Procedure to attain a Maximin Equilibrium:

1) Start from the first strategy, write down the minimum pay-off of the strategy among all alternative rival's strategies.
2) Move on to next strategy and repeat process 1) until all strategeis are exhausted.
3) Compare and choose the strategy that gives the highest minimum pay-off.
4) Do the same for rival, the result from process 3) and 4) is the equilibrium.

Example
Maximin Equilibrium Player B Maximin Equilibrium
Strategy 1 Strategy 2
Strategy 1 0, 0 -10 , 10 Player A's Maximin = -10
Player A
Strategy 2 -50 , 0 20 , 10 Player A's Maximin = -50
Player B's Maximin = 0 Player B's Maximin =10
Elimination of Dominated Strategies
Dominated Strategy is strategy which always yields the lowerest pay-off to the player, no matter which strategies the opponent chooses.
Dominant strategy is a strategy which is left after all dominated strategies have been eliminated.

Procedure to attain the solution:

1) For each assumed strategy of the oponet, find the strategy that gives the lowest pay-off. If the result show that there exists one strategy consistently being
"dominated" , eliminate that strategy from the matrix.
2) Do the same for player B.
3) The combination of strategies left for player A and player B is the "dominant strategy" for both player, and thus, the equilibrium of the game.
Elimination of Dominated
Dominant Strategies Player B Strategies Equilibrium
Strategy 1 Strategy 2
Strategy 1 10 , 10 11 , 30 Player A's Dominant Strategy
Player A
Strategy 2 5, 10 1, 30 Player A's Dominated Strategy
Player B's Dominated Strategy Player B's Dominant Strategy
Sequential Game
In this type of game, one player makes decision after the another player. The type of situation is called the "sequential game".
The game will be in the form of "Extensive form" (or "Game Tree" form) which is as follows:

In this type of game,

Sequential Game Strategy 1 player A makes decision first,
0 , 0 then player B makes decision.
Strategy 1 Strategy 2
7
Player B will choose strategy 2
Strategy 2 Strategy 1 -10 , 10 to maximize his pay-off
5

Strategy 2 -50 , 0
Knowing that Player B will choose
3
strategy 2, Player A will choose
strategy 2 to maximize his own
20 , 10 pay-off

Procedure to attain the sequential equilibrium: The procedure is called backward induction. It starts from the decision of the follower (B) since the leader (A)
must know how the follower is going to react to his strategy then use that information to maximize his own benefits.
1) Player B assumes that Player A choose the first strategy, then chooses her own strategy which will maximize her own pay-off. Mark the result Player B's pay-off .
2) Player B moves on to the next strategy of Player A and repeat step 1) until all Player A's strategies are exhausted.
3) Player A compare his pay-offs coresponding to the solution from step 1) and 2) and choose the strategy that gives him the highest pay-off. Mark the result
 Player A's pay-off.
4) The pair of pay-offs that has two marks is the solution.
Further Readings:
Pindyck, Robert S. and Daniel E. Rubinfeld. Microeconomics, (6th ed.), New Jersey: Prentice -Hall, 2005, Chapter 13.
Frank, Robert H. (6th ed.). Microeconomics and Behavior, New York: McGraw-Hill, 2005, Chapter 13.
Salvatore, Dominick, Microeconomics, (4th ed.), New York: Oxford University Press. 2003, Chapter 12.
Perloff, Microeconomics, ( 3rd ed.) Boston: Addison-Wesley, 2004, Chapter 14.
Miller, R.L., and R.P.H. Fishe. Microeconomics: Price Theory in Practice,New York: Harper Collins, 1995, Chapter 13.
Besanko, David, and Ronald R. Braeutigam, Microeconomics: An Integrated Approach, New York:John Wiley& Sons, 2002, Chapter 14.