FUN AND GAMES

Oindrila Dey, PhD

Department of Economics
IIFT, Kolkata Campus
 GAME THEORY: WHAT? & WHY?

A mathematical theory with huge potentiality of

applications in the study of human behavior.

Uses this metaphor of game to study many other

strategic interactions among individuals.

In Economics, deals with many situations like contest

among rival firms in market or competitive bidding
among bidders etc.
COOPERATION
CONFLICT
 WHAT IS ‘GAME’ IN GAME THEORY?

Constituents of game:

• Players: Two or more players.

• Rules: A set of rules and information level governing the

game.

• Strategies: The combination of set of actions in hand of each

player.

• Payoffs: An end result of the interaction of strategies of the

players.
EXPECTED OUTCOME FROM THIS
MODULE
Kenneth George "Ken" Binmore, is a British
mathematician, economist, and game theorist. He is a
Professor Emeritus of Economics at University College
London and a Visiting Emeritus Professor of Economics
at the University of Bristol
INTRODUCTION
 WHY DOES NOT WORK ALWAYS?

Individual are not always rational.

Some History…
 Traces of ideas of game theory are found earlier as in
1838 by Antoine Augustin Cournot (brought forward
the idea of Nash equilibrium in his theory of duopoly)
The Development of Modern Day
Game Theory Can be Credited to:
John Von Neumann
 AND OSKAR MORGENSTERN:

THEORY OF GAMES AND

ECONOMIC BEHAVIOUR (1944)
 GAME THEORY ( NON-COOPERATIVE)
All about Strategic Interaction
Icing on the Cake:
John (Beautiful Mind) Nash
 SCENE FROM A BEAUTIFUL MIND
- GAME THEORY

https://www.youtube.com/watch?v=LJS7Ig
vk6ZM
 COOPERATIVE
VS.
NON-COOPERATIVE GAME
• Cooperative game
Game in which participants can negotiate binding contracts that
allow them to plan joint strategies
e.g.: think of a market of any normal commodity

• Non- cooperative game

Negotiation and enforcement of binding contracts are not
possible.
• Thin line: Contracting possibilities
• Non- cooperative game=> understand opponent’s point of
view.
 MOTIVATION:
NON-COOPERATIVE
GAME

How to buy a dollar bill?

Martin Shubik (1982): Game theory in Social Sciences (Cambridge, MIT
press)
• A dollar bill is auctioned.
• The highest bidder wins and gets the bill
• But, second highest bidder pay and not get anything.

• If you are playing the game then how much would

you pay?
 CLASSIFICATION OF GAME

Timing Wise Games

1) Static Games (Simultaneous Move Games)
2) Dynamic Games (Sequential Move Games)

Payoff Wise Games

1) Zero Sum Games
2) Non- zero Sum Games

Information Wise Games

1) Complete information Games
2) Incomplete information Games
Basic Assumptions: Case of Complete
information models

 All players are rational. They know what is best

for themselves.
 All players have common knowledge.
Everybody knows everything
Everybody knows that everybody know
everything
……….Can go up to infinity
 Rationality is also common knowledge.
FAMOUS EXAMPLES

Standard Battle of Sexes

Matching Pennies

Prisoners’ Dilemma
BATTLE OF SEXES
 BATTLE OF SEXES

• Two Players: Husband and Wife.

• They are planning an evening out.
• They can both go to watch either a IPL T20 Cricket
Match or Yash Raj Movie.
• The Husband prefers Cricket Match over Movie.
• Whereas the Wife prefers Movie Over Cricket Match .
• But both hate to end up at different places.
• They decide simultaneously .
REPRESENTATION OF
GAMES

Normal Form

Extensive Form
NORMAL FORM REPRESENTATION
OF
‘BATTLE OF SEXES’ GAME

Wife
Husband

Cricket Movie
Cricket 4,2 0,0
Movie 0,0 2,4
EXTENSIVE FORM REPRESENTATION
OF
‘BATTLE OF SEXES’ GAME
Husband
Movie Cricket

Wife
M C M C

(2,4) (0,0) (0,0) (4,2)

 TERMINOLOGIES

• Game tree
• Sub- game
• Branches
• Nodes
Initial
Terminal
 Singleton
 Non-singleton
Information set
 COMPLETE VS. PERFECT
INFORMATION

Complete information:
Everybody knows everybody’s possible moves, payoffs
etc.
Player 1 knows everything about himself and Player 2
Player 2 knows everything about himself and Player 1
and so on
Perfect Information
All players are well-aware of the history of the game.
 MATCHING PENNIES

• Two Players: 1 and 2.

• They simultaneously put down two coins.
• So possible outcomes are ‘Heads’ or ‘Tails’.
• If the coins match then player 2 will give player
1 Re.1.
• Whereas if the coins doesn’t match then Player
1 will give Player 2, Re.1.
 NORMAL FORM
REPRESENTATION OF
‘MATCHING PENNIES’ GAME

Player 2
Heads Tails
Player 1

Heads 1 ,-1 -1,1

Tails -1,1 1,-1
 PRISONERS’ DILEMMA
• Two Prisoners:1 and 2

• They have committed a crime.

• Police catches them and asks separately whether they

have committed the crime or not.

• If they both ‘confess’ then the Crime is proved and they

each get 5 years in Jail.
 PRISONERS’ DILEMMA

• If both doesn’t confess then it is possible to sentence

them for a lesser crime and they each get 2 years in
jail.

• If only one confesses and the other doesn’t confess

then the confessing prisoner is appreciated for
cooperating with the investigation and he gets 1 year
in jail whereas the other gets 10 years for non
cooperation.
PRISONERS’ DILEMMA
NORMAL FORM REPRESENTATION
OF
‘PRISONERS’ DILEMMA’ GAME

Prisoner B
Confess Don’t Confess
Prisoner A

Confess -5,-5 -1, -10

Don’t -10,-1 -2,-2
Confess
NORMAL FORM REPRESENTATION
OF
‘PRISONERS’ DILEMMA’ GAME

Prisoner B
Confess Don’t Confess
Prisoner A

Confess -5,-5 -1, -10

Don’t -10,-1 -2,-2
Confess
 DOMINANT STRATEGY

Strategy which is optimal no matter what an

opponent does
Player B
Left Right
Player A

Top 1, 2 0, 1
Bottom 2, 1 1, 0
Check for previous games
 CONCEPT: NASH EQUILIBRIUM

Nash Equilibrium: All players’ actions are optimal given

the other’s actions.

No player will have an unilateral incentive to deviate

from a Nash equilibrium.

Look at the Pure Strategy Nash Equilibrium (Equilibria)

of the above mentioned game.
 NASH EQUILIBRIUM FOR
‘PRISONERS’ DILEMMA’ GAME

Prisoner B

Confess Don’t Confess

Prisoner A

Confess -5,-5 -1, -10

Don’t -10,-1 -2,-2

Confess
 ITERATED ELIMINATION OF
DOMINATED STRATEGIES

Find Nash Equilibrium

Player B
Left Middle Right
Player A

Up 1, 0 1, 2 0,1
Down 0, 3 0, 1 2,0
 NASH EQUILIBRIUM
VS.
DOMINANT STRATEGY
Dominant Strategy :
I am doing the best I can no matter what you do
You are doing the best you can no matter what I
do
Nash Equilibrium:
I am doing the best I can given what you are doing
You are doing the best you can given what I am
doing.
 LEARNING

• Dominant Strategy equilibrium is always a

Nash Equilibrium

Question
Is all Nash Equilibrium a dominant strategy
equilibrium as well?
Clue: Battle of Sexes
 ANOTHER APPROACH TO FIND
NASH EQUILIBRIUM
Check dominant strategy
Player B
Left Centre Right
Player A

Top 0,4 4,0 5,3

Middle 4,0 0,4 5,3
Bottom 3,5 3,5 6,6
 APPLICATION BASED EXAMPLES

Beach Location Game

• You(Y) and competitor(C) plan to put up a fast food
stall on a beach.
• Tourists on the beach are spread evenly across the beach
and they will walk to the closest vendor.
• What should be the optimal location for putting up the
stalls?
• Claim: Two of you will locate next to each other at
the centre of the beach
 LETS PLAY (GAME 1)

• Person 1 and 2 both simultaneously announce two

integers between 0 and 100 (inclusive).
(in fact write it down)
• The person whose announcement is closer 1/2 of
the mean of the announcements wins.
• What will be each player’s optimal announcement?
MIXED STRATEGIES
 MIXED STRATEGIES

• Let player 1 believes player 2 will play H with

probability q and T with probability 1-q.
• Let player 2 believes that player 1 will play H with
probability p and T with probability 1-p
Player 2
Heads(q) Tails(1-q)
Player 1

Heads(p) -1 ,1 1,-1
Tails(1-p) 1,-1 -1,1
Player 1
If plays H then her expected payoff is
[−1 × 𝑞 + 1(1 − 𝑞)] = 1 − 2𝑞
If plays T then her expected payoff
[1 × 𝑞 − 1(1 − 𝑞)] = 2𝑞 − 1
So player 1 will play H iff
1 − 2𝑞 > 2𝑞 − 1
1
𝑞 <
2
Player 1 will play T iff 𝑞 > 1/2
She is indifferent between playing H & T if 𝑞 = 1/2
 if q<1/2 then p=1
if q> 1/2 then p=0
q
if q=1/2 the pє (0,1)
1

0 1/2 1 p
Player 2
If plays H then her expected payoff is
1 × 𝑝 − 1 1 − 𝑝 = 2𝑝 − 1
If plays T then her expected payoff
−1 × 𝑝 − 1 1 − 𝑝 = 1 − 2𝑝
So player 2 will play H iff
2𝑝 − 1 > 1 − 2𝑝
1
p>
2
Player 1 will play T iff p< 1/2
She is indifferent between playing H & T if p= 1/2
 if p>1/2 then q=1
if p< 1/2 then q=0
q if p=1/2 the qє (0,1)

0 1/2 1 p
 Combining both
q Equilibrium p=1/2 & q 1/2

0 1/2 1 p
 PURE VS. MIXED
STRATEGIES

• A pure strategy game is mixed strategy game with

probability 1 for each strategy.
• A pure strategy is a degenerated mixed strategy.
• Mixed strategies other than pure strategies are non-
degenerated strategy.
 SEQUENTIAL GAMES

• Players move sequentially

• The second Player knows the move made by the first

mover
 DYNAMIC GAME
OF
‘BATTLE OF SEXES’ GAME
Husband
Movie Cricket

Wife
M C M C

(2,4) (0,0) (0,0) (4,2)

 DYNAMIC GAME
ACTION VS. STRATEGIES

• Strategy: A complete plan of action or a complete

contingent plan that specifies how the player will act
in every possible distinguishable circumstances in
which she might be called upon to move.
Strategy set of Husband is {C,M}which is the action
set.
𝐴𝐻 = 𝑆𝐻
For wife
𝐴𝑤 {𝐶, 𝑀} ≠ 𝑆𝑊 {𝐶𝐶, 𝐶𝑀, 𝑀𝐶, 𝑀𝑀}
 STRATEGY FOR PLAYER 2

Play C if H plays C
Play C if H plays M CC

Play C if H plays C
CM
Play M if H plays M

Play M if H plays C
MC
Plays C if H plays M

Play M if H plays C
MM
Play M if H plays M
 NORMAL FORM
REPRESENTATION FOR
DYNAMIC GAME

Wife
CC CM MC MM
Husband

C 4,2 4,2 0,0 0,0

M 0,0 2,4 0,0 2,4

• Three NE’s
• Is refinement possible?
 SPNE

Sub-game Perfect Nash Equilibrium

• The solution concept of subgame perfect Nash
equilibrium has been introduced by the German
mathematician and economist Reinhard Selten (1965)

Reinhard Selten (born on October 5, 1930)

received, together with John C. Harsanyi and John
F. Nash, the Nobel Memorial Prize in Economic
Sciences in 1994 for their “pioneering analysis of
equilibria in the theory of non-cooperative
games”.
 SUB-GAME PERFECT
NASH EQUILIBRIUM

• Definition
• A Nash equilibrium is a sub-game perfect Nash
equilibrium if the player’s strategies constitute a Nash
Equilibrium in every sub game.
• It helps in eliminating the non-credible Nash equilibria
 DYNAMIC GAME
OF
‘BATTLE OF SEXES’ GAME
Husband
Movie Cricket

Wife
M C M C

(2,4) (0,0) (0,0) (4,2)

 SPNE OF BATTLE
OF SEXES GAME
• Consider the 2 subgames

• SPNE {C,CM}

• {C,CC},{M,MM} are unstable equilibrium and they have

non-credible threats.

• SPNE can remove equilibria with non-credible threats.

• Observation: all SPNE are NE but all NE are not SPNE.

 BACKWARD INDUCTION

• First player takes into account the second player’s

optimal response and internalize that in her move.
• When husband ( 1st mover) chooses his strategy he
just folds back the whole game and determines his
optimal strategy.
 SEQUENTIAL BATTLE OF SEXES
FIRST MOVER: HUSBAND

Husband
Movie Cricket
Time 1
Wife
M C M C
Time 2
(2,4) (0,0) (0,0) (4,2)
 CHECK THE SEQUENTIAL
BATTLE OF SEXES

• Different outcomes if you make the wife first mover.

• For first mover Husband: Optimal outcome is Cricket,

Cricket.
• For first mover Wife: Optimal outcome is Movie,
Movie.

• These are the Backward Induction outcomes.

 LETS PLAY (GAME 2)
There are 27 coins.
There are two players, Player 1 and 2.
Each player has to pick-up 1, 2 or 3 coins
Players move sequentially.
Player 1 starts the Game.
The player who picks up the 27th coin wins.

CLAIM: The first player should always win if he plays

Rationally (optimally). Second Player has no chance of
winning.
The Game is heavily biased in favour of the first
mover
Change the previous game slightly so that the
game becomes biased towards the second
mover.