Part 1: Introduction to Game Theory

Game theory: set of tools for the analysis of interactive decision making (conflict-
ing/mutual interests).

Many Applications: Economics, Political Science, Biology,...

We model such a situation (with interactive decision makers) by means of a strategic

game, which is defined by the following elements:

• The players

• The actions/strategies

• The payoffs

These three define the “rules of the game”.

{
- purposeful;
Important assumption: the players are rational →
- no indecision, no mistakes.

Given the rules of the game, the players optimize a goal expressed through their
payoffs.

Example 1 : Matching pennies

Player 2
Heads T ails
Heads − 1, +1 +1, −1
Player 1
T ails + 1, −1 −1, +1

• Penalty kick

• Land and Sea game

Objective: to determine the strategies that the players should play as well as the
outcome(s) that should arise.

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 Chapter I: Strategic games in normal form

Strategic games in normal form are used to model simultaneous-move games.

The main assumptions are:

• the players are all rational;

• the players all move at the same time;

• each player has complete knowledge of the structure of the game.

I-1 Definition and examples

Definition A strategic (or non-cooperative) game in normal form, in short a normal-
[ ]
form game, is given by a tuple Γ = I, (Si )i∈I , (ui )i∈I , where:

• I is the non-empty set of players.

• For each i ∈ I, Si is a non-empty set and is called player’s i strategy set (or action
set).

• For each i ∈ I, ui : S → IR is player i’s payoff function. The amount ui (s) is i’s
payoff (or utility) if the joint strategy s is played.

Example 2 : The Prisoner’s Dilemma

Prisoner 2
Quiet F ink
Quiet − 2, −2 −10, −1
Prisoner 1
F ink − 1, −10 −5, −5

The payoffs are ordinal (only the ranking of the joint strategies matters)

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Example 3 : Cournot Oligopoly (linear price and linear costs)

Consider n firms operating in the same market. The inverse demand is given by:
{
a − bQ if Q ≤ a/b
P (Q) =
0 if Q > a/b
∑n
where Q = i=1 qi is the total output produced and a, b > 0.

The (constant) marginal cost of production for firm i is ci (i = 1, ..., n).

 What outputs should the firms produce?

 Write in normal form

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 I-2 Solution concepts
 Dominated strategies
[ ]
Definitions Consider a game Γ = I, (Si )i∈I , (ui )i∈I

1- Player i’s strategy s̄i is weakly dominated if there exists another strategy ŝi ∈ Si
such that:
ui (s̄i , s−i ) ≤ ui (ŝi , s−i ), for any s−i ∈ S−i ,
with the strict inequality for at least one s−i .

• In case the inequality holds strictly for all s−i ∈ S−i , s̄i is said to be strictly
dominated (by ŝi ).
• It is also common to say that ŝi (strictly/weakly) dominates s̄i .

2- Player i’s strategy ŝi is a weakly dominant strategy if it weakly dominates all the
other strategies of i. That is, if for any s̄i ̸= ŝi , we have:

ui (ŝi , s−i ) ≥ ui (s̄i , s−i ), for any s−i ∈ S−i ,

with the strict inequality for at least one s−i .

In case ŝi strictly dominates all the other strategies of player i, we say that ŝi is a
strictly dominant strategy.

Example 2 : The Prisoner’s Dilemma

→ Iterated Deletion of Strictly Dominated Strategies (IDSDS)

Prisoner 2
Quiet F ink
Quiet − 2, −2 −10, −1
Prisoner 1
F ink − 1, −10 −5, −5

For each prisoner, the strategy Quiet is (weakly and strictly) dominated by Fink.
The outcome of the procedure IDSDS is thus ( Fink, Fink ).

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 → Iterated Deletion of Weakly Dominated Strategies (IDWDS)

Player 2
L C R
T 4, 2 2, 2 0, 0
Player 1 M 2, 4 6, 2 4, 2
B 4, −4 2, −2 −2, −2

No dominant strategy. For player, B is weakly dominated (by T). For player 2, R is
weakly dominated (by C).
The outcome depends on the order of deletion. Eliminating B first gives the unique
joint strategy (T, L) as the outcome of IDWDS.

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 Best responses and Nash equilibrium
[ ]
Consider a game Γ = I, (Si )i∈I , (ui )i∈I .

Definition
- For every s−i ∈ S−i , the strategy si ∈ Si is called a best response of player i against
s−i if we have:
ui (si , s−i ) ≥ ui (s′i , s−i ), for any s′i ∈ Si .

- The set of best responses of player i against s−i is denoted by Bi (s−i ) and the multi-
valued function Bi is called the best response correspondence of player i.

Remarks
1- Every element of Bi (s−i ) must solve the problem: max ui (s′i , s−i ).
s′i ∈Si

2- A dominant strategy of player i is necessarily a best response against any s−i ∈ S−i .

Definition
A Nash equilibrium of the game Γ is a joint strategy s∗ = (s∗i )i∈I ∈ S such that, for any
i ∈ I,
ui (s∗i , s∗−i ) ≥ ui (si , s∗−i ), for any si ∈ Si .

That is to say, for any player i, s∗i is a best response to s∗−i .