STATIC GAMES

Swapnendu Banerjee
Department of Economics
Jadavpur University, Kolkata-700032
Game Theory (non-cooperative)
 All about Strategic Interaction
 Elements:
 1) Players
 2) Rules
 3) Payoffs
Very Early Contributors:
 Cournot (1838): His model was probably
the earliest that had seeds of Game
Theory in it. But he didn‟t realize that in
his lifetime. (Quantity Game)

 Bertrand (1888): His model also had

seeds of Game Theory. But he didn‟t
realize it either. (Price Game)
The Development of Modern Day
Game Theory Can be Credited to:
John Von Neumann
and Oskar Morgenstern:
Theory of Games and Economic
Behaviour (1944)
 Icing on the Cake:
John (Beautiful Mind) Nash
Other Important Contributors:
 Reinhard Selten: Formalized Sub-Game perfect
Nash equilibrium.

 Harsanyi: Formalized Bayesian Nash equilibrium.

 Robert Aumann: Formalized the concept of

„Common Knowledge‟.

 Lloyd Shapley: Formation of coalitions.

Basic Assumptions:
 All players are rational. They know what is
best for themselves.
 Complete Info: All players have common
knowledge.
 => Everybody knows everything
 => Everybody knows that everybody know
everything
 …….Can go up to infinity
 Rationality is also common knowledge.
 Timing Wise Games can be of two types:

1) Static Games (Simultaneous Move

Games)

2). Dynamic Games (Sequential Move

Games)
 Information Wise Games can be of two
types:

1). Games of Complete Information.

2). Games of Incomplete Information.

First we will focus on Complete Information

Games.
 Representation of Games:
Mainly in 2 ways

1). Normal Form (Also known as Strategic

form)…is a matrix type representation, mainly
useful for Static games.

2). Extensive Form…is a tree type

representation, mainly useful for Dynamic
games.

But both Static and Dynamic games can in

represented in both forms.
 Lets focus on Static Games first.

 Famous examples of static games of

complete information are the Standard
Battle of Sexes, Matching Pennies and the
Prisoners Dilemma
Battle of Sexes:
 Two Players: Husband and Wife.
 They are planning an evening out.
 They can both go to watch either a Football
match or an Opera.
 The Husband prefers Football over Opera.
 Whereas the Wife prefers Opera over
Football.
 But both hate to end up at different places.
 They decide simultaneously.
 Also known as a “coordination
game/problem”
Payoff matrix
Normal Form of Battle of Sexes

Wife

Football Opera
Husband

Football 4,2 0, 0

Opera 0, 0 2, 4

Ah={F,O}=Sh. Aw={F,O}=Sw
Matching Pennies:
 Two Players: 1 and 2.
 They simultaneously put down two coins.
 So possible outcomes are „Heads‟ or
„Tails‟.
 If the coins match then player 1 will give
player 2 Re.1.
 Whereas if the coins do not match then
Player 2 will give Player 1, Re.1.
Payoff matrix
Normal Form of Matching Pennies

Player B

Heads Tails
Player A

Heads -1, 1 1, -1

Tails 1, -1 -1, 1

Ah={H, T}=Sh. Aw={H,T}=Sw

Prisoner‟s Dilemma
 Two Prisoners:1 and 2

 They have committed a crime.

 Police catches them and asks separately

whether they have committed the crime or
not.

 If they both „confess‟ then the Crime is

proved and they each get 5 years in Jail.
Prisoners Dilemma (Contd.)

 If both „deny‟ then it is possible to

sentence them for a lesser crime and they
each get 2 years in jail.

 If only one confesses and the other

denies then the confessing prisoner is
appreciated for cooperating with the
investigation and he gets 1 year in jail
whereas the other gets 10 years for non
cooperation.
Prisoner‟s dilemma
Normal- or strategic form

Prisoner B

Confess Deny
Prisoner A

Confess -5, -5 -1, -10

Deny -10, -1 -2, -2

Iterated Elimination of Strictly Dominated Strategies

 In some games, the iterative process of

eliminating strictly dominated strategies lead
us to some prediction (sometimes unique)
about the result of the game (solution).

 In this case, we say that the game is solvable

by iterative elimination of strictly dominated
strategies.

 Let‟s see an example…

Iterated Elimination of strictly dominated strategies

LEFT MIDDLE RIGHT

UP 1,0 1,2 0,1

DOWN 0,3 0,1 2,0

If the red player is rational, it will never play “Right” because it

is strictly dominated by “Middle”. If the grey player knows that
red is rational, then he will play as if the game were…
Iterated Elimination of strictly dominated strategies
(IESDS)

LEFT MIDDLE

UP 1,0 1,2

DOWN 0,3 0,1

In this case if the grey player being rational will never play
down. The red player being rational knows that the grey
player being rational will never play Down. So the red player
can mentally eliminate Down. So, the red player will play as if
the game were:
Iterated Elimination of strictly dominated strategies

LEFT MIDDLE

UP 1,0 1,2

So, if the red player is rational, and he know that grey is

rational, and he knows that blue knows that he is rational,
then the red player will play “Middle”.

The solution of the game is (UP, Middle)

Problems with this solution concept…

Rationality being common knowledge is an important

assumption.

In many games there are no strategies that are strictly

dominated… or there are just a few and the process of
deletion does not take us to a solution but only to a smaller
game…
Example of a game were there are no dominated
strategies

LEFT MIDDLE RIGHT

UP 0,4 4,0 5,3

Middle 4,0 0,4 5,3

Bott 3,5 3,5 6,6

In this game, no strategies are dominated, so the concept of

iterated elimination of dominated strategies is not very
useful…
Let’s study the other solution concept…
 Nash Equilibrium: All players‟ actions are
optimal given the others‟ actions.
(A solution concept stronger than IESDS)

 No player will have an unilateral

incentive to deviate from a Nash
equilibrium.

 Look at the Pure Strategy Nash

Equilibrium (Equilibria) of the above
mentioned games.
 Note the following relationship b/w IESDS
and Nash Equilibria:

 All Nash Equilibria will survive IESDS .

 After IESDS if only one cell remains then it

must be a Nash Equilibrium.

 In all games IESDS might not work.

 IESDS might not lead to an unique

equilibrium always.
 Concept of strategies:

 A „Strategy‟ is a complete plan of action.

 That is a complete contingent plan that specifies

how a player will act in every distinguishable
circumstance in which she might be called upon to
make a move.

 For Static games of Complete Info

Action Set = Strategy set.

 For Dynamic Games (and other games) need not

be.
Nash Equilibrium in Mixed Strategies
 So far, we have used the word strategy. To be
more explicit, we were referring to pure
strategies.

 We will also use the concept of mixed

strategy or strategies.

 In a static game with complete information, a

mixed strategy is a vector that tell us with what
probability the player will play each action that
is available to him
Nash Equilibrium in Mixed Strategies
 Why are Mixed Strategies useful?

 Because in certain games, players might find it optimal

to have a random component in their behavior.

 For instance, a penalty taker might randomize while

taking a penalty. He might say that with prob 1/3, I
might shoot left or right or straight.

 This increases his effectiveness and keeps the Goal-

keeper guessing.
Nash Equilibrium in Mixed Strategies

Recall that the matching pennies game does not

have an equilibrium in pure strategies
Player 2
Heads Tails

Heads -1,1 1,-1

Player 1
Tails 1,-1 -1,1

Does this game have an equilibrium in mixed strategies?

 Player 2
Heads Tails
Player 1 Heads -1,1 1,-1
Tails 1,-1 -1,1

 Assume that Player 1 plays Heads with prob p

and Tails with prob (1-p).

 Player 2 plays Heads with prob q and Tails with

prob (1-q).
 Find the expected payoffs of Player 1 from playing
heads and tails:
E(H): (-1).q+ 1.(1-q) = 1-2q.
E(T): 1.q+ (-1).(1-q) = 2q-1.

So Player 1 will play H if (1-2q)>(2q-1), i.e. if q<1/2

So Player 1 will play T if (1-2q)<(2q-1), i.e. if q>1/2
If q=1/2, then player 1 is indifferent between H and T

The above implies:

p=1 if q<1/2.
p=0 if q>1/2.
p=[0, 1] if q=1/2.
 Similarly the expected payoffs of Player 2 from
playing heads and tails:
E(H): 1.p + (-1).(1-p) = 2p-1.
E(T): (-1).p + 1.(1-p) = 1-2p.

So Player 2 will play H if (2p-1)>(1-2p), i.e. if p>1/2

So Player 2 will play T if (2p-1)<(1-2p), i.e. if p<1/2
If p=1/2, then player 1 is indifferent between H and T

The above implies:

q=1 if p>1/2.
q=0 if p<1/2.
q=[0, 1] if p=1/2.
Drawing the best responses (probability
reaction):
Notice the vertical and horizontal lines are because
q of any p and q within [0,1] are optimal at q=1/2 and
p=1/2.

q*(p); player-2
1
1

1/2
p*(q): For player-1

0
1/2 1 p
Existence of Nash Equilibrium

 A game could have more than one Nash

Equilibrium.

 The same game could have equilibria in both

pure and mixed strategies or only pure or only
mixed.

 Note that a pure strategy is a mixed strategy

where one action has probability 1.

 Thus a pure strategy is a specific case of mixed

strategy.
 A pure strategy is a “Degenerate Mixed
Strategy” where all probabilities except
one degenerate to 0 and only one
becomes 1.

 A mixed strategy where more than one

probability is non-zero is known as a
“Non-degenerate Mixed Strategy”.

 Thus any game has at least one NE, in

mixed strategies, be it a degenerate or
non-degenerate.
 Technical: Normal Form Representation of a Non-
Zero-Sum Game with n players
n players.

Set of n strategy spaces S1 , S2 …Sn

where Si = The set of strategies available to player i

And n payoff functions

u1 , u 2 … u n
where
ui : S1 x S2 x … Sn →
is a function that takes a combination of strategies (one for
each player) and returns the payoff for player i
 One Typical element of S1 x S2 x … Sn is an n-dimentional
vector s  s1 , s2 ,....., sn  where si is the strategy of the ith
Player.

A Finite Normal Form can be represented as:

G= {n; S1 , S2 …Sn ; u1 , u2 … un}

A strategy profile s*  s1*, s2 *,......, sn * constitutes a Nash

equilibrium if for all i the following holds:

ui si *, si *  ui si, si * , 

si  Si
 Theorem by Nash (1950):

In the n-player normal-form game

G= {n; S1 , S2 …Sn ; u1 , u2 … un}, if n is finite
and Si is finite for every i, then there exists at
least one Equilibrium, possibly in Mixed
strategies.

(So Nash‟s original Theorem talks about a certain

existence of Mixed Strategy Nash Equilibria)
Existence of Pure Strategy Nash
Equilibrium:
In the n-player normal-form game
G= {n; S1 , S2 …Sn ; u1 , u2 … un } a Nash
Equilibrium exists if:

(1). Si is non-empty, convex and compact

subset of some Euclidean space.

(2). u1(s1 , s2 ,....., sn) is continuous in (s1 , s2 ,....., sn )

and is quasi-concave in si .
Lets Play (Game 1):
 Person 1 and 2 both simultaneously
announce two integers between 0 and
100 (inclusive). (in fact write it down)
 The person whose announcement is
closer to 2/3rd of the mean of the
announcements wins.
 What will be the optimal announcement
for each player?