[ECO502A] Applied Game Theory

Week 1: Lecture 1

Game: Denition and Examples

2020-21-I
What is a game?

I What is a game?
What is a game?

I What is a game?

I Cricket, Football, Hockey, Tennis.

What is a game?

I What is a game?

I Cricket, Football, Hockey, Tennis.

I Tic-tac-toe, Rock-paper-scissors, Video games.

What is a game?

I What is a game?

I Cricket, Football, Hockey, Tennis.

I Tic-tac-toe, Rock-paper-scissors, Video games.

I Think of all possible games. Can we use these examples to

come up with a general denition of a game?
Game - Denition

I A game in an everyday sense can be dened as a competitive

activity in which players contend with each other according to
a set of rules.
Game - Denition

I A game in an everyday sense can be dened as a competitive

activity in which players contend with each other according to
a set of rules.

I A game need not result in a win-lose situation always. It can

result in a win-win situation, or in a lose-lose situation also.
Game - Denition

I A game in an everyday sense can be dened as a competitive

activity in which players contend with each other according to
a set of rules.

I A game need not result in a win-lose situation always. It can

result in a win-win situation, or in a lose-lose situation also.

I Considering a real life situation, the word `players' can be

replaced by decision makers.
Game - Denition

I A game in an everyday sense can be dened as a competitive

activity in which players contend with each other according to
a set of rules.

I A game need not result in a win-lose situation always. It can

result in a win-win situation, or in a lose-lose situation also.

I Considering a real life situation, the word `players' can be

replaced by decision makers.

I A game can be thus be understood as an interaction between

the strategies of many decision makers.
Game - Denition

I A game in an everyday sense can be dened as a competitive

activity in which players contend with each other according to
a set of rules.

I A game need not result in a win-lose situation always. It can

result in a win-win situation, or in a lose-lose situation also.

I Considering a real life situation, the word `players' can be

replaced by decision makers.

I A game can be thus be understood as an interaction between

the strategies of many decision makers.

I Consider the game of cricket for an example. The game can

be understood as an interaction of strategies between the
bowler and the batsman.
Mathematical Model

I Games are broadly classied into non-cooperative and

cooperative games.
Mathematical Model

I Games are broadly classied into non-cooperative and

cooperative games.

I We will now restrict attention to non-cooperative games.

Specically, to strategic or normal form games.
Mathematical Model

I Games are broadly classied into non-cooperative and

cooperative games.

I We will now restrict attention to non-cooperative games.

Specically, to strategic or normal form games.
I A strategic form game Γ is a tuple Γ = hN, (Si )i∈N , (ui )i∈N i,
where
I N = {1, 2, . . . , n} are a set of nite players,
I S1 , S2 , . . . , Sn are the strategy sets,
I ui : ×ni=1 Si → R are the utility functions.
Mathematical Model

I Games are broadly classied into non-cooperative and

cooperative games.

I We will now restrict attention to non-cooperative games.

Specically, to strategic or normal form games.
I A strategic form game Γ is a tuple Γ = hN, (Si )i∈N , (ui )i∈N i,
where
I N = {1, 2, . . . , n} are a set of nite players,
I S1 , S2 , . . . , Sn are the strategy sets,
I ui : ×ni=1 Si → R are the utility functions.
I Observe that the utility of each player is a function of the
strategies of every single player.
Example 1: Prisoners' Dilemma

A crime has taken place, and two suspects are arrested. The
policemen put them in two dierent cells, and give them the
following choices:

I If they both choose not to confess their crime, they can't be

held for long. They remain in prison for two years each, and
then they have to be released eventually.

I If one chooses to confess, and the other remains stubborn,

then the confessed prisoner is given a concession of being in
jail only for one year, whereas the other prisoner is punished
heavily to serve a prison term of ten years.

I If both choose to confess, then the case becomes very strong.

They will serve a prison term of ve years each.
Example 1: Prisoner's Dilemma

I The game has two players, i.e., the prisoners. So N = 2. They

have two strategies each: S1 = S2 = {Not Confess, Confess}.
The utility matrix for (u1 , u2 ) is given as
P
H 2
HH
NC C
P1 HH H
NC -2, -2 -10, -1
C -1, -10 -5, -5
Example 1: Prisoner's Dilemma

I The game has two players, i.e., the prisoners. So N = 2. They

have two strategies each: S1 = S2 = {Not Confess, Confess}.
The utility matrix for (u1 , u2 ) is given as
P
H 2
HH
NC C
P1 HH H
NC -2, -2 -10, -1
C -1, -10 -5, -5

I The utilities of each prisoner depends on the strategy of the

other prisoner also.

I Each prisoner has a control though, since the outcome also

depends on his own strategy.
Example 1: Prisoner's Dilemma

I The game has two players, i.e., the prisoners. So N = 2. They

have two strategies each: S1 = S2 = {Not Confess, Confess}.
The utility matrix for (u1 , u2 ) is given as
P
H 2
HH
NC C
P1 HH H
NC -2, -2 -10, -1
C -1, -10 -5, -5

I The utilities of each prisoner depends on the strategy of the

other prisoner also.

I Each prisoner has a control though, since the outcome also

depends on his own strategy.

I This is a clear example of a game that occurs in real life.

Example 1: Prisoner's Dilemma

I The game has two players, i.e., the prisoners. So N = 2. They

have two strategies each: S1 = S2 = {Not Confess, Confess}.
The utility matrix for (u1 , u2 ) is given as
P
H 2
HH
NC C
P1 HH H
NC -2, -2 -10, -1
C -1, -10 -5, -5

I The utilities of each prisoner depends on the strategy of the

other prisoner also.

I Each prisoner has a control though, since the outcome also

depends on his own strategy.

I This is a clear example of a game that occurs in real life.

I Is it actually a real life game?

Example 1a: Arms Race
I Consider the arms race between two countries. Each of the
two countries have $100mn to start with. They have the
following options:
I They both can choose to spend the money for welfare (i.e.,
education, healthcare). They get a utility of 100 million each.
I If one chooses to spend the money on buying arms, then it
attacks the other country and plunders its wealth. It receives a
utility of 200 million, leaving the other country with a loss of
100 million.
I If both choose to spend the money on buying arms, then both
are in the same level, and they get a zero utility.
Example 1a: Arms Race
I Consider the arms race between two countries. Each of the
two countries have $100mn to start with. They have the
following options:
I They both can choose to spend the money for welfare (i.e.,
education, healthcare). They get a utility of 100 million each.
I If one chooses to spend the money on buying arms, then it
attacks the other country and plunders its wealth. It receives a
utility of 200 million, leaving the other country with a loss of
100 million.
I If both choose to spend the money on buying arms, then both
are in the same level, and they get a zero utility.
I The utility matrix now becomes

H H C2
H
Wel Arms
C1 H
H
H
Wel 100, 100 -100, 200
Arms 200, -100 0,0
Example 1a: Arms Race
I Consider the arms race between two countries. Each of the
two countries have $100mn to start with. They have the
following options:
I They both can choose to spend the money for welfare (i.e.,
education, healthcare). They get a utility of 100 million each.
I If one chooses to spend the money on buying arms, then it
attacks the other country and plunders its wealth. It receives a
utility of 200 million, leaving the other country with a loss of
100 million.
I If both choose to spend the money on buying arms, then both
are in the same level, and they get a zero utility.
I The utility matrix now becomes

H H C2
H
Wel Arms
C1 H
H
H
Wel 100, 100 -100, 200
Arms 200, -100 0,0

I The game is exactly the same as prisoners' dilemma, with only

a change in the specic numbers of the utility matrix.
Example 1b: Duopoly
I Consider a duopoly setting, where two rms produce the same
good. They can either choose to charge a low price or a high
price.
I If each rm chooses high price, then both get a prot of $1000.
I If each rm chooses low price, then both get a prot of only
$600.
I If one chooses high price and the other chooses low price, then
the rm with low price captures the whole market and gets a
prot of $1200. The rm with high price is left with a loss of
$200.
Example 1b: Duopoly
I Consider a duopoly setting, where two rms produce the same
good. They can either choose to charge a low price or a high
price.
I If each rm chooses high price, then both get a prot of $1000.
I If each rm chooses low price, then both get a prot of only
$600.
I If one chooses high price and the other chooses low price, then
the rm with low price captures the whole market and gets a
prot of $1200. The rm with high price is left with a loss of
$200.
I The utility matrix now becomes

F
HH 2
HH
High Low
F1 HH
High 1000, 1000 -200, 1200
Low 1200, -200 600, 600
Example 1b: Duopoly
I Consider a duopoly setting, where two rms produce the same
good. They can either choose to charge a low price or a high
price.
I If each rm chooses high price, then both get a prot of $1000.
I If each rm chooses low price, then both get a prot of only
$600.
I If one chooses high price and the other chooses low price, then
the rm with low price captures the whole market and gets a
prot of $1200. The rm with high price is left with a loss of
$200.
I The utility matrix now becomes

F
HH 2
HH
High Low
F1 HH
High 1000, 1000 -200, 1200
Low 1200, -200 600, 600

I Same as prisoners' dilemma.

Example 2: Battle of Sexes

I Consider the case where a couple ghts regarding what needs

to be watched in TV at a particular time. The husband is
interested in watching a cricket match, and the wife is
interested in watching a serial. Both are relayed at the same
time in dierent channels.
Example 2: Battle of Sexes

I Consider the case where a couple ghts regarding what needs

to be watched in TV at a particular time. The husband is
interested in watching a cricket match, and the wife is
interested in watching a serial. Both are relayed at the same
time in dierent channels.

I The strategy sets of both the players are S1 = S2 = {Sport,

Serial}. The utility matrix is given as

W
HH
HH Sport Serial
H H
H
Sport 3, 1 0, 0
Serial 0, 0 1, 3
Example 2: Battle of Sexes

I Consider the case where a couple ghts regarding what needs

to be watched in TV at a particular time. The husband is
interested in watching a cricket match, and the wife is
interested in watching a serial. Both are relayed at the same
time in dierent channels.

I The strategy sets of both the players are S1 = S2 = {Sport,

Serial}. The utility matrix is given as

W
HH
HH Sport Serial
H H
H
Sport 3, 1 0, 0
Serial 0, 0 1, 3

I Also called Bach or Stravinsky. The abbreviation BoS is set to

mean both the names!
Example 3: Matching Pennies

I Consider a simple game of gambling. Two players toss a coin.

If the coins match, i.e., if both fall heads or both fall tails,
player 1 gives a penny to player 2. If they do not match, then
player 2 gives a penny to player 1.
Example 3: Matching Pennies

I Consider a simple game of gambling. Two players toss a coin.

If the coins match, i.e., if both fall heads or both fall tails,
player 1 gives a penny to player 2. If they do not match, then
player 2 gives a penny to player 1.

I The strategy sets of both the players are S1 = S2 = {Head,

Tail}. The utility matrix is

HH P2
H
Head Tail
P1 H H
H
Head -1, 1 1, -1
Tail 1, -1 -1, 1
Example 3: Matching Pennies

I Consider a simple game of gambling. Two players toss a coin.

If the coins match, i.e., if both fall heads or both fall tails,
player 1 gives a penny to player 2. If they do not match, then
player 2 gives a penny to player 1.

I The strategy sets of both the players are S1 = S2 = {Head,

Tail}. The utility matrix is

HH P2
H
Head Tail
P1 H H
H
Head -1, 1 1, -1
Tail 1, -1 -1, 1

I An example of a zero-sum game. A game which always results

in a `win-lose' situation at any instance.
Denition Revisited

I Recall the denition of a game as a competitive activity in

which players contend with each other according to a set of
rules.
Denition Revisited

I Recall the denition of a game as a competitive activity in

which players contend with each other according to a set of
rules.

I Based on the examples, we can conclude that a game can

alternatively be dened as an `interaction between the
strategies of decision makers'.
Denition Revisited

I Recall the denition of a game as a competitive activity in

which players contend with each other according to a set of
rules.

I Based on the examples, we can conclude that a game can

alternatively be dened as an `interaction between the
strategies of decision makers'.

I The utility of each player depends on the strategies of all

players, including his own.
Denition Revisited

I Recall the denition of a game as a competitive activity in

which players contend with each other according to a set of
rules.

I Based on the examples, we can conclude that a game can

alternatively be dened as an `interaction between the
strategies of decision makers'.

I The utility of each player depends on the strategies of all

players, including his own.

I Game theory is the study of mathematical models of

interaction between the strategies of rational and intelligent
decision makers.
Denition Revisited

I Recall the denition of a game as a competitive activity in

which players contend with each other according to a set of
rules.

I Based on the examples, we can conclude that a game can

alternatively be dened as an `interaction between the
strategies of decision makers'.

I The utility of each player depends on the strategies of all

players, including his own.

I Game theory is the study of mathematical models of

interaction between the strategies of rational and intelligent
decision makers.

I We will dene rationality and intelligence in the following

classes.
Applications

I Economics: The primary application of game theory. Any

economic activity can be modeled as an interaction between

strategic agents.
Applications

I Economics: The primary application of game theory. Any

economic activity can be modeled as an interaction between

strategic agents.

I Politics: The best example for interaction of strategic

decision makers.
Applications

I Economics: The primary application of game theory. Any

economic activity can be modeled as an interaction between

strategic agents.

I Politics: The best example for interaction of strategic

decision makers.

I Biological phenomena: Many phenomena such as evolution

of sex ratio, and nesting behavior of wasps, are explained using

game theoretic principles.
Applications

I Economics: The primary application of game theory. Any

economic activity can be modeled as an interaction between

strategic agents.

I Politics: The best example for interaction of strategic

decision makers.

I Biological phenomena: Many phenomena such as evolution

of sex ratio, and nesting behavior of wasps, are explained using

game theoretic principles.

I Networks: Formation of networks involve strategic agents.

To Probe Further

1. Martin J. Osborne, An Introduction to Game Theory", Oxford

University Press, 2003.

2. Y Narahari, Game Theory and Mechanism Design, IISc

Press, 2014.

3. Andeu Mas-Colell, Michael D Whinston, Jerry R Green,

Microeconomic Theory, Oxford University Press, 1995.