DYNAMIC GAMES:

AppliCations
Swapnendu Banerjee
Jadavpur University
Kolkata, INDIA
 1.
Example 1
Centipede Game
 Centipede game
✘ Rosenthal, R. (1981). "Games of Perfect Information, Predatory Pricing, and the Chain
Store". Journal of Economic Theory. 25 (1): 92–100
✘ We consider a truncated version of the centipede game
Assumptions:
✘ Finite period game
✘ Two players 1 & 2
✘ Each player start with $1
✘ Any Player can ‘stop’ the game at any point or can say ‘continue’, i.e., action set { stop, continue}
✘ If any player says ‘stop’ the game ends and both gets what they have till that point, if any player says
‘continue’ then $1 is taken away from her kitty and $2 is added to the other player’s kitty.
✘ Alternatively the game stops till each player gets $6.
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 Centipede Game

Continue P1 P2 P1 P2 P1 P2 P1 P2
P1 (6,6)
P2
Stop

(1,1) (0,3) (2,2) (1,4) (3,3) (2,5) (4,4) (3,6) (5,5) (4,7)

✘ Solve the game

✘ Solution: ??
✘ Conclusion: Acting rationally may hurt both the players
 Reference: MWG, Ch9, Section 9.B,
4 Example: 9.B.5
 2..
Repeated games
Dynamic games of complete information
(but of Imperfect Information)
 Repeated Prisoners’ dilemma game
✘ Consider the Prisoners’ Dilemma game is repeated (Slightly changes payoffs)
P2

Confess (C) Deny (D)

P1 Confess (C) 1,1 5,0

Deny (D) 0,5 4,4

✘ The payoffs represent the gain out of a particular action (positive sense).
✘ The dominant strategy Nash equilibrium is (C,C).
✘ Pareto superior outcome (that will make both strictly better-off) is (D,D) but it is a non-Nash.
✘ Q: What will be the solution if this game is played for two periods?
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 Repeated Prisoner’s dilemma game
✘ In Period 2 ✘ In Period 1
P2 P2
Confess Deny (D) Confess (C) Deny (D)
(C)
Confess 1,1 5,0
(C) Confess (C) 2,2 6,1
P1 P1
Deny (D) 0,5 4,4
Deny (D) 1,6 5,5

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 Generalization of the result
 Definition
✘ Given a stage game G, which is finitely repeated for T period, then
that repeated game is denoted by G(T)
 Result:
✘ If the stage game G has a unique NE then for any finite period T, the
repeated game G(T) has an unique sub-game perfect outcome, i.e.,
the NE of G is played in every stage.
✘ If time horizon is known then there is no scope of convergence to the
pareto improved outcome (which is non-Nash of G).
 Way out ???

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 3...
Infinite Period Repeated
games
Dynamic games of complete information
(Imperfect Information)
 Infinitely repeated Prisoners’ Dilemma
 Given a stage game G, which is infinitely repeated, then that infinitely
repeated game is denoted by G(∞)
 Adding up payoffs across periods we get
P2
Confess (C) Deny (D)
P1 Confess (C) (∞, ∞) (∞, ∞)

Deny (D) (∞, ∞) (∞, ∞)

=> Not helpful

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 Solving Infinitely repeated game
✘ Use discount factor
✘ If there is a sequence of payoff is 𝜋1 , 𝜋2 , … , then the present
discounted value is calculated as
𝜋1 +𝛿𝜋2 +𝛿 2 𝜋3 + ⋯ = ∞
𝑡=1 𝛿
𝑡−1 𝜋
𝑡

 Suppose both players have the same discount factor (simplicity)

 Suppose both players follow trigger strategy

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 Trigger strategy
✘ I will cooperate till the time you cooperate; if you do not cooperate once, I
will not cooperate forever.

Cooperate
✘ If player 1 plays D forever
(i.e., he/she ‘cooperates’)
then player 2 to also plays D.
✘ Present Discounted payoff of
player 1
4 + 𝛿4 + 𝛿 2 4 + 𝛿 3 4 + ⋯
4
= 4(1 + 𝛿 + 𝛿 2 +𝛿 3 +…)= 1−𝛿
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Deviate
✘ If player 1 plays C once (i.e.,
deviates from cooperation)
then player 2 plays C from
next period onwards.
✘ Present Discounted payoff of
player 1
5 + 𝛿. 1 + 𝛿 2 . 1 + 𝛿 3 . 1 + ⋯
𝛿
= 5 + (𝛿 + 𝛿 2 +𝛿 3 +…)=5+ 1−𝛿
 Trigger strategy
✘ Player 1 will not deviate iff
4 𝛿
≥ 5+
1−𝛿 1−𝛿
1
⇒ 𝛿≥
4
1
✘ Similarly Player 2 will not deviate iff 𝛿 ≥ 4
✘ Interpretation of 𝛿
✗ If value of 𝛿 is low then the player is impatient (today’s gain is more
valued)
✗ If value of 𝛿 is high then player is patient (values future payoffs)
=>Patient player will co-operate valuing future stream of payoffs.
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 Folk (lore) theorem
✘ Friedman, J. (1971). "A non-cooperative equilibrium for
supergames". Review of Economic Studies. 38 (1): 1–12.
✘ Let G be a finite static game of complete information. Let
(𝜋1 , 𝜋2 , … , 𝜋𝑛 ) denote the payoff from NE of G and let (𝑥1 , 𝑥2 , … , 𝑥𝑛 )
denote any other feasible payoffs of G. If 𝑥𝑖 > 𝜋𝑖 ∀𝑖 and 𝛿 is
sufficiently close to unity then there exist a sub game perfect
outcome of infinitely repeated game 𝐺(∞, 𝛿) that achieves
(𝑥1 , 𝑥2 , … , 𝑥𝑛 ) as an average outcome.
 Reference: Gibbons, Ch2, Section 2.3.B

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