4.

Extensive-Form Games: Topics

Summary
Benjamin Bernard
Kuhn’s Theorem
Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Absent-Minded Driver

S E

S E Hotel

Bad Neighborhood Home

Absent-minded driver:
• An absent-minded driver drives home on a highway.
• At each exit he/she can choose to (E)xit or (S)tay on the highway.
• Behavior strategy xE + (1 − x )S leads home with probability x (1 − x ).
• No mixed strategy xsE + (1 − x )sS leads home:
• With probability x , the driver will end up at the hotel.
• With probability 1 − x , the driver will end up in the bad neighborhood.
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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Keeping Your Story Straight

h1
F A
2
h
F A F A

Truth Inconsistent Lie Consistent Lie

Press briefings:
• The White House press secretary can either state a (F)act or an (A)lter-
native fact in two consecutive press briefings. Lying may be beneficial
if it is done sufficiently rarely to maintain one’s credibility.
• The mixed strategy xsFF + (1 − x )sAA tells the truth with probability
x and it always tells a consistent story.
• A behavior strategy that tells the truth at hk with probability x k leads
to a consistent story only if x 1 = x 2 = 1 or if x 1 = x 2 = 0.
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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Perfect Recall

Definition 4.3

A player i has perfect recall if for every hi ∈ Hi and any two x , x ′ ∈ hi :

1. Neither x ≺ x ′ nor x ′ ≺ x .
2. If there exists xb ≺ x with i(bx ) = i, then there exists xb′ ∈ hi (b
x ) with
′ ′ ′ ′
xb ≺ x such that a(b x → x ) = a(b x → x ).

2
A
1 2
B
2
Second condition:
• Knowing a node means knowing the entire history of the game.
• If predecessors xb, xb′ of x , x ′ ∈ hi belong to different information sets,
player i forgets information he/she knew at xb, xb′ .
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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Finding SPE in Mixed / Behavior Strategies

h10 Lℓ Lr Rℓ Rr
L R Lℓ −1, 1 −1, 1 2, 0 2, 0
h2L h2R

L R ℓ r Lr −1, 1 −1, 1 0, 2 0, 2

h11 Rℓ 0, 3 0, 1 0, 3 0, 1
−1, 1 0, 1
ℓ r ℓ r
Rr 2, 0 0, 1 2, 0 0, 1
2, 0 0, 2 0, 3 2, 0
→ yields mixed equilibria
Behavior strategy profile:
• σ 1 (h10 ) = αL + (1 − α)R,
• σ 1 (h11 ) = βℓ + (1 − β)r ,
• σ 2 (h2L ) = γL + (1 − γ)R,
• σ 2 (h2R ) = δℓ + (1 − δ)r .

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Existence of SPE
Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Proof of Theorem 4.5

1
2 2

3 1
3
1 1 1 1
2 2
3 3
2 2 1 1 2 2 3

Existence:
• By Nash’s Theorem, G has a Nash equilibrium in mixed strategies.
• By Kuhn’s Theorem, G has a Nash eq. σ in behavior strategies.
• On the path, σ is already subgame perfect by Proposition 3.9.
• Off the path, we replace the continuation profile in maximal strict
subgames with an SPE of that subgame (exists by inductive hypothesis).
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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Proof of Theorem 4.5

Defining a candidate profile:

• Fix any Nash equilibrium σ of G(x∗ ).
• Let Xs denote the nodes in Xx∗ that start the strict subgames and set

Xs′ := {x ∈ Xs | Pσ (x ) = 0 and G(x ) ̸⊆ G(x ′ ) for x ′ ∈ Xs \ {x }}.

b to be equal to an SPE σx on subgame G(x ) for x ∈ Xs′ (exists

• Define σ
by the inductive hypothesis) and let σ
b coincide with σ otherwise.

Verifying subgame perfection:

• Since σ
b coincides with σ on its path, it is a Nash equilibrium of G(x∗ ).
• The restriction of σ
b to any G(x ) for x ∈ Xx∗ is a Nash equilibrium either:
• by definition of an SPE if G(x ) is contained in G(x ′ ) for x ′ ∈ Xs′ ,
• or by Proposition 3.9 if Pσ (x ) > 0.
• We conclude that σ
b is an SPE.
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Multi-Stage Games
Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Multi-Stage Game

time

G1 G2 G3 G4 G5

Multi-stage game:
• Players I = {1, . . . , n} play a sequence of static games G t = (I, At , u t ),
called stage games, in periods (or stages) t = 1, . . . , T .
• The length of the game T may be finite or infinite.

Repeated games:
• A repeated game is the special case, in which the same stage game is
repeated in each period, i.e., G t = G for all t.

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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Game Tree

1
Period 1

Period 1
2

1 1 1 1

Period 2
2 2 2 2

Continuation games:
• The only proper subgames start in some period t with history ht .
• The continuation game is identical for each history ht ∈ Ht and every
player has the same information ht in the continuation game.
• Because the game may be infinite, there may be no terminal nodes.
Payoffs are earned at the end of each period instead.
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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

S T B G
S −1, −1 −10, 0 B 0, 0 −10, −1

T 0, −10 −9, −9 G −1, −10 −3, −3

t=1 t=2

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Modeling Incomplete Information
Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

States of Nature

States of nature:
• The state of nature θ is the (vector of) unknown payoff-relevant states.
• The range of values that θ can take is Θ, with typical element ϑ.
• Note that θ is a random variable, whereas ϑ is deterministic.
• Player i’s ex-post utility is a map ui : A × Θ → R with value ui (a, ϑ).

Player-specific payoff characteristic:

• An important special case is where θ = (θ1 , . . . , θn ) and player i’s
utility depends only on θi , i.e., ui : A × Θi → R.
• Example: firm i’s unit cost θi in a Cournot or Bertrand competition.
• Example: buyer i’s valuation θi of the auctioned good.
• Example: player i’s alignment θi in a game of Avalon.
• Example: the state of repair θ of the customer’s car.
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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Types

Types:
• Player i’s type Ti determines what player i knows/believes about:
• the state of nature (first-order beliefs).
• the other players’ knowledge/beliefs (higher-order beliefs).
• Player i’s possible types are in Ti with typical element τi .
• Note that Ti is a random variable, whereas τi is deterministic.
• We have seen that we can express τi as an information set: a type is
completely characterized by the information he/she has.

Types vs. states of nature:

• A player’s type determines his/her knowledge and beliefs, whereas the
state of nature determines the players’ payoffs.
• Note that players might not know their player-specific state of nature:
the customer does not know the car’s state of repair.
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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Beliefs

Beliefs:
• A player’s beliefs are a distribution over Θ × T1 × . . . × Tn .
• Before players learn their type/information, they share a common prior P.
• After learning his/her type τi , player i updates his/her beliefs using
Bayes’ rule to the posterior beliefs Pτi = P( · | Ti = τi ).

Independent types:
• If players have independent types, then

Pτi (T−i = τ−i ) = P(T−i = τ−i | Ti = τi ) = P(T−i = τ−i ),

hence τi only captures a player’s information about θ.

• This case is commonly studied because it greatly simplifies the analysis.

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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

States of the World

States of the world:

• A state of the world ω is an elementary outcome of the model’s uncer-
tainty. It determines types Ti (ω) and state of nature θ(ω) completely.
• The primary purpose for modeling states of the world is to capture the
correlation of different states of nature and/or the players’ knowledge.
• It is always possible to choose Ω = Θ × T1 × . . . × Tn , but in finite
applications there is often a more intuitive choice.

Avalon:
• We can choose Ω as the set of all possible distribution of roles.
n
• Ω is smaller than Θn = {Good, Evil} and much smaller than Θn × T n .
• Writing down the model using Ω
e = Θ × T1 × . . . × Tn would be painful.

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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

The Mechanic’s Recommendation

τ2N
8% ωR,H ωN,H 72%
τ11 τ12
ϑR ϑN
τ2R
2% ωR,D ωN,D 18%
τ13 τ14

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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Special Cases

Payoff types:
• If player i’s only information is the knowledge of his/her own payoff-
characteristic θi , we say that θi = Ti is player i’s payoff type.
• In that case drop the notation τi and write σi : Θi → Ai .
• The use of Ω may still be helpful to correlate payoff types.

Independent payoff types:

• There is no need for Ω and we have Θ = T = Ω.
• Examples include auctions with independent valuations or competition
among firms with independent cost.

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Kuhn’s Theorem Existence of SPE Multi-Stage Games Modeling Incomplete Information

Common-Value Auction

Oil exploration:
• The government auctions off an oil field to two companies i = 1, 2.
• The value θ of the oil field could be high (ϑH ), medium (ϑM ), or low
(ϑL ), with prior probabilities 41 , 12 , and 41 .
• Through an exploration, each company i receives either a high signal τiH
or a low signal τiL about its value. Suppose that both signals are high
in ϑH , exactly one signal is high in ϑM , and both signals are low in ϑL .
• Find the belief space.

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