Lecture 7: Nash Equilibria in Mixed Strategies

Vera Sharunova

1 TV Programming Game (Again)

Last time we found NBC’s and CBS’s best responses to each other’s actions as a function
of their respective beliefs about them. The intersection of the two best responses repre-
2 9 1
sented the mixed-strategy Nash equilibrium of the game ( 11 Sitcom+ 11 Sports, 11 Sitcom+
10
11
Sports). We could find this equilibrium using a more analytical method.

Finding MNE by Maximizing Expected Payoffs

It is natural to assume that both TV networks would want to maximize their expected
payoff from the game with respect to their mix of strategies, while taking the mixture of
the opponent as given. Expected payoff is the sum of payoffs that a player can achieve
in each outcome of a game multiplied by the probability of the game reaching that
outcome1 .

CBS
q 1−q
Sitcom Sports
p Sitcom 12, -12− -6, 6|
NBC
1−p Sports -8, 8| -4, 4−

Start with NBC. They maximize their expected payoff with respect to their mixing
variable p, given the mixing of CBS q

max EUNBC (p, q) = 12pq − 6p(1 − q) − 8(1 − p)q − 4(1 − p)(1 − q)

p

Differentiate EUNBC wrt p and set it equal to zero to obtain the NBC’s first order
condition

12q − 6(1 − q) + 8q + 4(1 − q) = 0

q∗ = 1
11
1
If the game is repeated multiple times, we can interpret expected payoff as the average payoff from
a single game.

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Notice that when we maximize NBC’s expected payoff we obtain the optimal
mixture for CBS! Once again we see that in zero-sum games it is optimal to keep the
opponent guessing, so that they cannot systematically predict your actions and use it to
their advantage (because they will have a clear pure-strategy best response, see Figures
2 and 3 in Lecture 6). We can emphasize the opponent’s indifference property by
rearranging the FOC as shown below and comparing it to NBC’s expected payoffs from
following pure strategies, given that CBS follows a mixture q.

12q − 6(1 − q) = −8q − 4(1 − q)

EUNBC (Sitcom, qSitcom + (1 − q)Sports) = EUNBC (Sports, qSitcom + (1 − q)Sports)

Therefore, CBS’s optimal choice of q makes NBC indifferent between playing either of
their pure strategies – Sitcom and Sports.

Now let’s look at CBS. They maximize their expected payoff with respect to their mixing
variable q, treating the mixing of NBC p as a constant

max EUCBS (p, q) = −12pq + 6p(1 − q) + 8(1 − p)q + 4(1 − p)(1 − q)

q

Differentiate EUCBS wrt q and set it equal to zero to obtain the CBS’s first order condition

−12p − 6p + 8(1 − p) − 4(1 − p) = 0

p∗ = 2
11

Similarly, NBC’s optimal choice of p makes CBS indifferent between playing either of
their pure strategies, Sitcom and Sports. So the mixed-strategy Nash equilibrium is
2 9 1
( 11 Sitcom + 11 Sports, 11 Sitcom + 10
11
Sports).

NB: To save time, you can use the opponent’s indifference property to find the equilib-
rium mixtures of strategies.

2 Tax Compliance Game

Let us consider the following toy model of tax filing and auditing process. The taxpayer
can file their taxes honestly or cheat. Somewhat unrealistically, let us assume that the
auditor chooses whether to audit the taxpayer or not at the same time the taxpayer
makes his choice. If the taxpayer is caught cheating, he has to not only pay the missing
taxes, but also a large fine. So the taxpayer only wants to cheat if he is not going to be
audited, otherwise he will file the taxes honestly. Let’s assume that auditing is costly.
The payoffs in this toy game could be as follows

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Taxpayer
q 1−q
Honest Cheat
Audit p 2, 0 4, -10
Auditor
Don’t Audit 1−p 4, 0 0, 4

This game has no pure-strategy Nash equilibria, but it has a mixed-strategy Nash equi-
librium. In order to find it, let p stand for the probability of being audited and q stand
for the probability of filing taxes honestly. In the mixed-strategy Nash equilibrium,
the taxpayer should be indifferent between filing taxes honestly or cheating given the
mixture p and the auditor should be indifferent between auditing the taxpayer or not.

2
EUA (Audit, q) = 2q + 4(1 − q) = EUA (Don’t Audit) = 4q + 0(1 − q) ⇒ q ∗ =
3
2
EUT (Honest, q) = 0p + 0(1 − p) = EUT (Cheat) = −10p + 4(1 − p) ⇒ p∗ =
7
So the mixed-strategy Nash equilibrium is ( 27 Audit + 75 Don’t Audit, 32 Honest + 13 Cheat).

Q: How can we interpret q ∗ ? Assume that this game is played with each taxpayer in the
United States, then q ∗ can be interpreted as the equilibrium tax compliance rate and p∗
could be interpreted as the equilibrium auditing rate. Therefore, another interpretation
of mixed strategies is the proportion of people playing a given pure strategy in the
general population.

Incentive to Deviate
When we deal with pure-strategy Nash equilibria, it is very easy to check if any of
the players have an incentive to deviate. We just need to check if a player in question
achieves a greater payoff from any of the remaining pure strategies, given the strategies
of the opponents. Q: But how do we know that there are no other mixed-strategy Nash
equilibria that achieve a greater payoff ? We cannot possibly check if deviations are
profitable for all possible mixed strategies (like we did with pure ones) since there are
infinitely many of them.

In the game above, let us check if p∗ is a best response to q ∗ . For p∗ to not be a best
response, there has to be a profitable deviation that would make the auditor strictly
better off given the taxpayer’s mixture q ∗ . In particular, the auditor could deviate to
playing either of his pure strategies, Audit or Don’t Audit. Let’s calculate the auditor’s
payoffs in both of these cases.

EUA (Audit, q ∗ ) = 2 23 + 4 31 = 8
3

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EUA (Don’t Audit, q ∗ ) = 4 23 + 0 13 = 8

3

EUA (p∗ , q ∗ ) = 27 EUA (Audit, q ∗ ) + 57 EUA (Don’t Audit, q ∗ ) = 2

7
· 83 + 57 · 8
3
= 8
3

When we are considering possible mixed-strategy deviations, the expected payoffs of

doing so will always be a weighted average of expected payoffs from playing pure strate-
gies, given the mixture of the opponent q ∗ . But they both yield the same payoff as p∗ .
Therefore, we only ever have to check for strictly profitable PURE-strategy
deviations.

Policy Experiment

Taxpayer
q 1−q
Honest Cheat
Audit p 2, 0 4, -20
Auditor
Don’t Audit 1−p 4, 0 0, 4

Suppose that the government increases the fine for tax evasion, so that the payoff from
being caught cheating increases to -20.

Q: What do you think will happen to the equilibrium tax compliance rate? Nothing,
because the equilibrium tax compliance rate is calculated from the auditor’s payoffs,
which have not changed. What will be affected as a result of this policy is the equilib-
rium auditing rate, which in itself is good since auditing is costly.

To find new p∗
1
EUT (p, Honest) = 0p + 0(1 − p) = EUT (p, Cheat) = −20p + 4(1 − p) ⇒ p∗ =
6
So the new mixed-strategy Nash equilibrium is ( 16 Audit + 65 Don’t Audit, 23 Honest +
1
3
Cheat).

Q: What policy would increase q ∗ ? The one that affects auditors’ payoffs. Make auditing
less costly.

Q: Do rich people cheat more often? If the auditors’ payoffs from auditing rich people
is the same as from auditing poor people, q ∗ would be the same irrespective of income.
But rich people have more to gain from evading taxes, so they get audited more often.

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3 An Example of a 3 × 2 Game
If a game is such that both of the players have only two pure strategies, it is obvious
that all of the strategies have to be used in the mixture, otherwise we go back to the
pure strategy Nash equilibrium concept. But how do we find optimal mixtures if at least
one of two players has more than two pure strategies? Let us first consider an example
of a 3 × 2 game.

Player 2
R K W
C p 1, 3 2, -2 0, 6
Player 1
B 1−p 3, 1 1, 4 5, 0

(a) Graph Player 2’s expected payoffs from each of his pure strategies as a function of
Player 1’s mix p.

First, let us derive the expected payoffs from Player 2’s pure strategies, given that the
opponents chooses mixture p.

EU2 (R, p) = 3p + (1 − p) = 2p + 1
EU2 (K, p) = −2p + 4(1 − p) = 4 − 6p
EU2 (W, p) = 6p + 0(1 − p) = 6p
See Figure 1 for graphical representation.

(b) What are Player 2’s best responses to Player 1’s choice of p? Which pure strategies
will Player 2 use in his equilibrium mixture? Explain.

As we can see in Figure 1, pure strategy R is never a best response to any mixture of
the opponent p. Therefore, Player 2 will not use R in the equilibrium mix since he can
achieve a higher payoff by using a mixture between K and W. You can reach the same
conclusion analytically as well:

1. R achieves a higher payoff than K if 2p + 1 > 4 − 6p ⇒ p > 83 .

2. R achieves a higher payoff than W if 2p + 1 > 6p ⇒ p < 41 .

3. K achieves a higher payoff than W if 4 − 6p > 6p ⇒ p < 31 .

Therefore,

1. If p < 14 , then the best response of Player 2 is K, since K > R > W .

1
2. If 4
< p < 31 , then the best response of Player 2 is K, since K > W > R.

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EU2 EU2

5 , p)
W
2(
EU
4

3
, p)
E U 2(R
2

0 p = Pr(P1 chooses C)
1 1 3
4 3 8
EU
−1 2 (K
, p)
−2
Figure 1: Expected payoffs of Player 2 from choosing either R, K, or W as a function of
his belief about Player 1’s actions.

1
3. If 3
< p < 83 , then the best response of Player 2 is W, since W > K > R.

4. If p > 38 , then the best response of Player 2 is W, since W > R > K.

Again, pure strategy R is never a best response to any mixture of the opponent p. Thus,
Player 2 will never use R in the equilibrium mix.

(c) What is the mixed-strategy Nash equilibrium of this game?

Removing R from consideration, we get a familiar 2 × 2 game.

Player 2
q 1−q
K W
C p 2, -2 0, 6
Player 1
B 1−p 1, 4 5, 0

Start with writing down Player 1’s expected payoffs from using her pure strategies and
setting them equal.

EU1 (C, q) = 2q + 0(1 − q) = 2q

EU1 (B, q) = q + 5(1 − q) = 5 − 4q

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2q = 5 − 4q ⇒ q ∗ = 5
6

Similarly for Player 2

EU2 (K, q) = −2p + 4(1 − p) = 4 − 6p

EU2 (W, q) = 6p + 0(1 − p) = 6p
6p = 4 − 6p ⇒ p∗ = 1
3

Therefore, the mixed-strategy Nash equilibrium of this game is ( 13 C + 23 B, 56 K + 61 W).