Simultaneous Games- Mixed Strategies

Abdul Quadir
XLRI

19 December, 2019
Reading: Dixit and Skeath, 7
Rationalizability

I Calculation of Nash equilibrium depends on the following two

factors:
I Compute your best choice given your belief about others’
choices.
I The belief of each player must be correct. (convergence of
expectation)
I Can we justify strategic choices made by player on the basis of
rationality alone?
I The answer is no. See the following example:
L C R
T 0,7 2,5 7,0
M 5,2 3,3 5,2
B 7,0 2,5 0,7
I All nine outcomes are logically conceivable.
Rationalizability

I Calculation of Nash equilibrium depends on the following two

factors:
I Compute your best choice given your belief about others’
choices.
I The belief of each player must be correct. (convergence of
expectation)
I Can we justify strategic choices made by player on the basis of
rationality alone?
I The answer is no. See the following example:
L C R
T 0,7 2,5 7,0
M 5,2 3,3 5,2
B 7,0 2,5 0,7
I All nine outcomes are logically conceivable.
Rationalizability

I Recall that a rational player will not play dominated strategies.

I We can get a similar notion known as never a best response.
I A rational player will not play never a best response.
I Therefore, we can narrow down the set of strategies using this
concept.
I The set of strategies that survive elimination on this ground
are called rationalizable.
I The concept is known as rationalizability.
Example: Rationalizability

I Consider the following game:

L C R
T (3,3) (0,0) (0,2)
M (0,0) (3,3) (0,2)
B (2,2) (2,2) (2,0)
I Note that R is never a best response for column Player and B
is never a best response for row Player.
I The reduces game will look like
L C
T (3,3) (0,0)
M (0,0) (3,3)
Example: Rationalizability

I Consider the following game:

L C R
T (3,3) (0,0) (0,2)
M (0,0) (3,3) (0,2)
B (2,2) (2,2) (2,0)
I Note that R is never a best response for column Player and B
is never a best response for row Player.
I The reduces game will look like
L C
T (3,3) (0,0)
M (0,0) (3,3)
Quantity Competition Between Two Firms

I Consider two firms which produce identical products.

I The price depends on what they produce p = 60 − (q1 + q2 )
I Per unit cost of production is 30 and 36 for firm 1 and 2,
respectively.
I Both the firms are profit maximizer.
I Compute the Nash equilibrium for this game.
I Their profit functions are given by

π1 (q1 , q2 ) = (60 − q1 − q2 )q1 − 30q1

u2 (q1 , q2 ) = (60 − q1 − q2 )q2 − 36q2
Quantity Competition Between Two Firms

I Consider two firms which produce identical products.

I The price depends on what they produce p = 60 − (q1 + q2 )
I Per unit cost of production is 30 and 36 for firm 1 and 2,
respectively.
I Both the firms are profit maximizer.
I Compute the Nash equilibrium for this game.
I Their profit functions are given by

π1 (q1 , q2 ) = (60 − q1 − q2 )q1 − 30q1

u2 (q1 , q2 ) = (60 − q1 − q2 )q2 − 36q2
Quantity Competition Between Two Firms
I Given q2 , firm 1 can maximize its profit by maximizing π1
over q1 .
I F.O.C. implies that

60 − 2q1 − q2 − 30 = 0.

I The best response function for firm 1

q2
q1 = 15 − .
2
I Similarly, the best response function for firm 2
q1
q2 = 12 −
2
I Solving these two equations, we have

q1∗ = 12, q2∗ = 6, p ∗ = 42 π1 = 144, π2 = 36

Best Response Curves
q2

30

q2
q1 = 15 − 2

12

q1
q2 = 12 − 2

15 24 q1
Rationalizability: Quantity Competition Between Two
Firms
I First round: what are the rational beliefs of firm 1 and 2 for
their production ranges?
I From the graph, we see that q1 ∈ [0, 15].
I Thus, firm 2 believes that any negative number or higher than
15 is not possible for firm 1.
I Similarly, q2 ∈ [0, 12] and firm 1 believes that firm 2 will not
produce any negative or higher quantity than 12.
I Second round: Since firm 1 has concluded that firm 2 will not
produce more than 12, then firm 1’s production is
q1 = 15 − 12
2 = 9.
I The best response for q2 = 0 is 15.
I Thus, firm 1’s choice is restricted to the range of [9, 15].
I Similarly, firm 2’s production is restricted to [12, 4.5] to the
best response of q1 = 0 and q1 = 15.
Rationalizability: Quantity Competition Between Two
Firms
I First round: what are the rational beliefs of firm 1 and 2 for
their production ranges?
I From the graph, we see that q1 ∈ [0, 15].
I Thus, firm 2 believes that any negative number or higher than
15 is not possible for firm 1.
I Similarly, q2 ∈ [0, 12] and firm 1 believes that firm 2 will not
produce any negative or higher quantity than 12.
I Second round: Since firm 1 has concluded that firm 2 will not
produce more than 12, then firm 1’s production is
q1 = 15 − 12
2 = 9.
I The best response for q2 = 0 is 15.
I Thus, firm 1’s choice is restricted to the range of [9, 15].
I Similarly, firm 2’s production is restricted to [12, 4.5] to the
best response of q1 = 0 and q1 = 15.
Rationalizability: Quantity Competition Between Two
Firms

I Third round: If firm 1’s production is q1 = 9,

q2 = 12 − 29 = 7.5.
4.5
I If q2 = 4.5, then q1 = 15 − 2 = 12.75
I Thus, firm 1’ restricted production range now is [9, 12.75]
I In this way the successive round will eventually give you
q1 = 12 and q2 = 6.
Rationalizability
q2

30

q2
q1 = 15 − 2

12

7.5
4.5 q1
q2 = 12 − 2

9 12.7515 24 q1
Rationalizability
q2

30

q2
q1 = 15 − 2

12

7.5
4.5 q1
q2 = 12 − 2

9 12.7515 24 q1
Matching Pennies

I Matching Pennies:
I Consider two players whose payoffs add to zero.
I Consider two players toss two coins. If it matches H and H or
T and T , then Player 1 is paid Rs. 1 by Player 2.
I Otherwise, Player 2 is paid Rs. 1 by player 1.
h t
H (1,-1) (-1,1)
T (-1,1) (1,-1)
I Is there any Nash equilibrium for this game?
I There is no pure strategy Nash equilibrium.
Matching Pennies

I Matching Pennies:
I Consider two players whose payoffs add to zero.
I Consider two players toss two coins. If it matches H and H or
T and T , then Player 1 is paid Rs. 1 by Player 2.
I Otherwise, Player 2 is paid Rs. 1 by player 1.
h t
H (1,-1) (-1,1)
T (-1,1) (1,-1)
I Is there any Nash equilibrium for this game?
I There is no pure strategy Nash equilibrium.
Mixed Strategies

I Suppose players are choosing their pure strategies

unsystematically.
I This means in a sense that they are choosing their pure
strategies randomly.
I Randomization over pure strategies is known as mixed
strategies.
I In other words, mixed strategies are probabilities associated
with each strategies.
I Note that since mixed strategies are probabilities, they must
lie in [0, 1].
I Therefore, there are like the continuous strategies.
I Pure strategies are special case of mixed strategies.
Expected Payoff

I We assume independent randomization among players.

I How one player randomizes over his set of strategies will not
depend on how others randomize.
I Consider the following game:
C D
A (50,50) (80,20)
B (90,10) (20,80)
3
I Suppose Player 1 plays strategy A with probability 4 and
strategy B with probability 14 .
1
I Player 2 plays C with probability 4 and D with probability 34 .
I What are the expected payoffs of players playing their
strategies?
Expected Payoffs
I Row player (Player 1) is playing A with with probability 34 and
strategy B with probability 14 .
I Given this strategy, the expected payoff of Player 2 is given:

3 1
Playing C : × 50 + × 10 = 40
4 4
3 1
Playing D : × 20 + × 80 = 35
4 4
 
I Against the mixed strategy 43 , 41 for player 1, the best for
Player 2 is to play C .
I Therefore, if Player 2 plays D for the above strategy, the
expected payoff of Player 1:
3 1
× 50 + × 90 = 60 if player 2 plays C
4 4
3 1
× 80 + × 20 = 65 if player 2 plays D
4 4
Indifference Principle

I Note that Player 2 can exploit player 1 by playing C for this

mixed strategy.
I Thus, this is not optimal mix for Player 1.
I The ideal mixed strategy will be where there is no exploitation
of player 1 by player 2 and vice versa.
I This will arise if Player 1 choose a mixed strategy that leave
player 2 indifferent in choosing strategy C and D.
I In other words, player 1 will choose the mixed strategy that
makes the expected payoff of player 2 same for C and D.
I This principle is known as indifference property.
I This is the key for mixed strategy equilibria in non-zero sum
game.
Computation of Mixed Strategy
I To compute exploitation proof mixed strategy, we assign
probability p to the strategy A of player 1.
I Thus, the expected payoff of Player 2 is:
Playing C : p × 50 + (1 − p) × 10
Playing D : p × 20 + (1 − p) × 80
I Player 2 will be indifferent in playing C and D if the expected
payoffs are same for either playing C or D.
I Therefore, we have
p × 50 + (1 − p) × 10 = p × 20 + (1 − p) × 80
I Solving this we get p = 0.7.
I Thus, the exploitation proof mixed strategy for player 1 is
(0.7, 0.3).
I Compute the expected payoff of the mixed strategy (0.7, 0.3)
and compare it with the expected payoffs of pure strategy and
the strategy (0.75,0.25).
Best Response

I Suppose player 2 plays C with probability q and D with

probability (1 − q).
I What is the best response of Player 1 p for the choices of q of
player 2?
I First compute the expected payoff of player 1 if Player 2 plays
C or D.

p × 50 + (1 − p) × 90 if Player 2 plays C
p × 80 + (1 − p) × 20 if Player 2 plays D

I What is the expected payoff of Player 1 against the mixed

strategy q of player 2?

[50p + 90(1 − p)]q + [80p + 20(1 − p)](1 − q)

Best Response

I Suppose player 2 plays C with probability q and D with

probability (1 − q).
I What is the best response of Player 1 p for the choices of q of
player 2?
I First compute the expected payoff of player 1 if Player 2 plays
C or D.

p × 50 + (1 − p) × 90 if Player 2 plays C
p × 80 + (1 − p) × 20 if Player 2 plays D

I What is the expected payoff of Player 1 against the mixed

strategy q of player 2?

[50p + 90(1 − p)]q + [80p + 20(1 − p)](1 − q)

Best Response

I Suppose player 2 plays C with probability q and D with

probability (1 − q).
I What is the best response of Player 1 p for the choices of q of
player 2?
I First compute the expected payoff of player 1 if Player 2 plays
C or D.

p × 50 + (1 − p) × 90 if Player 2 plays C
p × 80 + (1 − p) × 20 if Player 2 plays D

I What is the expected payoff of Player 1 against the mixed

strategy q of player 2?

[50p + 90(1 − p)]q + [80p + 20(1 − p)](1 − q)

Best Response

I Suppose player 2 plays C with probability q and D with

probability (1 − q).
I What is the best response of Player 1 p for the choices of q of
player 2?
I First compute the expected payoff of player 1 if Player 2 plays
C or D.

p × 50 + (1 − p) × 90 if Player 2 plays C
p × 80 + (1 − p) × 20 if Player 2 plays D

I What is the expected payoff of Player 1 against the mixed

strategy q of player 2?

[50p + 90(1 − p)]q + [80p + 20(1 − p)](1 − q)

Best Response

Rearranging the above equation

[50p + 90(1 − p)]q + [80p + 20(1 − p)](1 − q) = 50pq + 90q − 90pq+

80p + 20 − 20p − 80pq − 20q + 20pq

This equates to

70q − 100pq + 60p + 20 = [20 + 70q] + [60 − 100q]p

I Note that we are trying to find p to maximize the Player 1’s

expected payoff given q.
I See the coefficient of p, that is 60 − 100q.
Best Response

I If 60 − 100q > 0, player 1 can increase his expected payoff by

increasing p.
I Thus, if q < 0.6, p = 1.
I If 60 − 100q < 0, player 1 can increase his expected payoff by
decreasing p.
I Thus, if q > 0.6, p = 0.
I For q = 0.6, any p-mix is the best response.
I We can summarize it as:
If q < 0.6, the best response is p = 1.
If q = 0.6, any p-mix is a best response. If q > 0.6, best
response is p = 0.
I This is the best response of Player 1 for Player 2’s strategies.
Best Response Graph

0.6 1 q
Best Response

I Similarly we can compute the best response for player 2.

I The expected payoff of player 2 is:

[50q + (1 − q)20]p + [10q + 80(1 − q)](1 − p)

I Rearranging we get

(80 − 60p) + (100p − 70)q

I Note that if the coefficient of q is positive, then player 2 will

increase q.
I Thus,we have
If p < 0.7, best response is q = 0
If p = 0.7, any q-mix is a best response.
If p > 0.7, best response is q = 1.
Best Response

I Similarly we can compute the best response for player 2.

I The expected payoff of player 2 is:

[50q + (1 − q)20]p + [10q + 80(1 − q)](1 − p)

I Rearranging we get

(80 − 60p) + (100p − 70)q

I Note that if the coefficient of q is positive, then player 2 will

increase q.
I Thus,we have
If p < 0.7, best response is q = 0
If p = 0.7, any q-mix is a best response.
If p > 0.7, best response is q = 1.
Best Response Graph

0.7 1 p
Nash Equilibrium
q

0.6

0.7 1 p
 
Mixed strategy Nash equilibrium is (0.7, 0.3), (0.6, 0.3) .
Nash Equilibrium
q

0.6

0.7 1 p
 
Mixed strategy Nash equilibrium is (0.7, 0.3), (0.6, 0.3) .
Mixed Strategy
I We can also use the indifference property and calculate the
optimal mixed strategy q.
I Thus, the expected payoff of Player 1 is:

Playing A : q × 50 + (1 − q) × 80
Playing B : q × 90 + (1 − p) × 20

I Player 1 will be indifferent in playing A and B if the expected

payoffs are same for either playing A or B.
I Therefore, we have

q × 50 + (1 − q) × 80 = q × 90 + (1 − q) × 20

I Solving this we get q = 0.6.

I If probabilities are coming out to be negative or greater than
1, then there is no mixed strategy Nash equilibrium.
Mixed Strategy NE in Coordination Games

I Consider the coordination

X Y
X (1,1) (0,0)
Y (0,0) (3,3)
I Suppose Player 1 and Player 2 are playing X with probability
p and q, respectively.
I What is the mixed strategy Nash equilibria?
I Player 1:

X : 1 × q + (1 − q) × 0 = q
Y : 0 × q + 3 × (1 − q) = 3(1 − q)

I Thus, q = 3(1 − q) implies q ∗ = 43 .

I Similar calculation will yield p ∗ = 34 .
Mixed Strategy NE in Coordination Games

I Consider the coordination

X Y
X (1,1) (0,0)
Y (0,0) (3,3)
I Suppose Player 1 and Player 2 are playing X with probability
p and q, respectively.
I What is the mixed strategy Nash equilibria?
I Player 1:

X : 1 × q + (1 − q) × 0 = q
Y : 0 × q + 3 × (1 − q) = 3(1 − q)

I Thus, q = 3(1 − q) implies q ∗ = 34 .

I Similar calculation will yield p ∗ = 34 .
Best Response

I The expected payoff of Player 1 if player 2 plays X is p and if

he plays Y , then it is 3(1 − p)
I Thus, the expected payoff of Player 1 is

pq + 3(1 − p)(1 − q) = 3(1 − q) + (4q − 3)p

I This implies that If q < 34 , best response is p = 0

If q = 34 , any p-mix is a best response.
If q > 34 , best response is p = 1.
I Since Player 2 is symmetric, his best response is similar to
player 1.
If p < 34 , best response is q = 0
If p = 43 , any q-mix is a best response.
If p > 34 , best response is q = 1.
Best Response

I The expected payoff of Player 1 if player 2 plays X is p and if

he plays Y , then it is 3(1 − p)
I Thus, the expected payoff of Player 1 is

pq + 3(1 − p)(1 − q) = 3(1 − q) + (4q − 3)p

I This implies that If q < 34 , best response is p = 0

If q = 34 , any p-mix is a best response.
If q > 34 , best response is p = 1.
I Since Player 2 is symmetric, his best response is similar to
player 1.
If p < 34 , best response is q = 0
If p = 43 , any q-mix is a best response.
If p > 34 , best response is q = 1.
Best Response Graph for Player 1

0.75 1 q
Best Response Graph for Player 2

0.75

1 q
Nash Equilibria
p

0.75

0.75 1 q

Three Nash equilibria (0, 0), (1, 1), (0.75, 0.75).

Nash Equilibria
p

0.75

0.75 1 q

Three Nash equilibria (0, 0), (1, 1), (0.75, 0.75).

Exercise

1. Compute the Nash equilibria of matching pennies game and

draw the best response functions of both the players.
2. Compute the mixed strategy Nash equilibia of the following
matrix game:
X Y
X (2,1) (0,0)
Y (0,0) (1,2)
Also draw the best response functions of both the players on a
graph.