MICROECONO

MICS INTERNAL ASSESSMENT

SESSION 2019-20

TOPIC:

‘A short note on the use of game theory in the analysis of the international

relations’
(Game Theory)
 Submitted by:

Name - Shreya Mittal Roll No. - 2497 Section - 1

In this document the international relations between Iran and Israel have been analysed using game
theory. The situation has been explained by taking two cases having different objectives and
assumptions. The first case is of pure strategy and has been solved using Nash equilibrium, Pareto
efficiency and Maximin strategy, while the second case is that of a mixed strategy.

CASE 1

❖ A brief background of the situation

Global suspicion and concern are aroused with Iran’s nuclear research program. From news it is seen
that there is a possibility of an Israeli or a U.S. attack on the Iranian nuclear facilities. The basic
ideology behind this is that if Iran continues its research, and, say, an Israeli attack occurs, Iran can
retaliate. Thus, any potential attacker will have to foresee the consequences of its action against
Iran. Accordingly, Iran has to assess the magnitude of costs that deter a potential attacker. The
attacker can make a guess about whether Iran has strong incentives to misrepresent its incentives in
its will and ability to retaliate. Iran can in turn try to guess whether the attacker takes its stand about
retaliation seriously.

❖ Explaining the situation in terms of game theory

We can qualify the above interaction as constituting a game, i.e., a situation consisting strategic
interdependence. Each decision maker acts according to the actions that the other (or others) can
take. The best choices of Iran and the attacker depend on their forecasts of the behaviour of each
other. An Iranian decision influences the gains an attacker obtains and costs an attacker suffers and
the attacker’s decision in turn influences Iranian decision to retaliate or not.

This is therefore a simultaneous game.

• PURE STRATEGY

Here we take the problem of Iran’s nuclear research activities constituting yet another source of
conflict between Iran and Israel, and, opt for the simplest possible model at strategic level: a 2 × 2
game. Assume that Israel has two strategies: attack and do not attack. Assume that Iran also has two
strategies: stop nuclear research and do not stop (continue). Hence, we have two players and each
player has two strategies. The outcome matrix is shown below in table 1:
 Table 1: Outcome Matrix

Now in order to obtain a game matrix we need to specify both countries’ preferences over these
outcomes.

The simplest way to model the interaction is to specify players’ preferences in the form of their
primary and secondary objectives. Assume that Iran’s main objective is to become a nuclear power
and Israel’s main objective is the inverse i.e. Iran does not become a nuclear power.

Assuming that an Israeli attack cannot destroy all Iranian facilities, Iran mostly prefers outcomes 3
and 4 as compared to outcomes 1 and 2. The decision “stop” prevents Iran from attaining its most
preferred objective. Therefore, for Iran, we have {outcome 3, outcome 4} > {outcome 1, outcome 2}.
Iran therefore has a dominant strategy to ‘continue’. Now suppose also that Iran prefers outcome 4
to outcome 3 and outcome 2 to outcome 1 as it prefers no Israeli attack which is its secondary
objective. These assumptions lead to the following preference ordering for Iran: outcome 4 >
outcome 3 > outcome 2 > outcome 1.

Israel prefers outcomes 1 and 2 as compared to outcomes 3 and 4 because Iran’s stop decision leads
to the fulfilment of Israel’s main objective: Iran does not become a nuclear power. So, for Israel, we
have {outcome 1, outcome 2} > {outcome 3, outcome 4}. Israel therefore has a dominant strategy of
‘do not attack’. Suppose also that Israel prefers outcome 2 to outcome 1 and outcome 4 to outcome
3 because it prefers to avoid a military failure; its secondary objective. These assumptions lead to the
following preference ordering for Israel: outcome 2 > outcome 1 > outcome 4 > outcome 3.

Now assuming ordinal-level preferences, with 4 indicating the best, 3 the next-best, 2 the next
worst, and 1 the worst outcome for players (i.e. 4 > 3 > 2 > 1). The game matrix is therefore shown
below in table 2:

Table 2: Payoff Matrix

The first number in each cell represents Iran’s preference for that outcome and the second number
represents that of Israel. We can also represent this in an extensive form which is shown below in
figure 1. The dotted loop in this figure means that this is a simultaneous game. The sequence of
moves by the players is explicitly shown. Each node represents a player’s choice between the
 options available over each branch and the final terminal nodes show the outcomes with respective
payoffs for each player.

Figure 1: Extensive form

We can say from observation that Israel obtains better outcomes by choosing “do not attack”
regardless Iran’s choices. Israel gets 4 instead of 3 against Iran’s decision “stop”, and, 2 instead of 1
against Iran’s decision of “continue” when it choses “do not attack”. Similarly, Iran obtains better
outcomes by choosing “continue” regardless of Israel’s choices: Iran obtains 3 instead of 1 against
Israel’s decision to “attack” and 4 instead of 2 against Israel’s decision of “do not attack”.

Therefore, the equilibrium is “continue, do not attack”. This is ‘pure Nash equilibrium’. This
equilibrium having a payoff of (4,2) is represented in the form of a graph in figure 2 below:

LE

A
2
R

I
1.5
PURE NASH EQUILIBRIUM2.5 1
0.5
0
0 1 2 3 4 5 IRAN
(4,2)

Figure 2: Graphical Representation of Pure Nash Equilibrium

Thus, we explain the situation between Iran and Israel regarding Iranian nuclear research through a
drastic simplification: there are only two players, each has two strategies, they simultaneously
interact only once, their preferences are ordered as per the primary and secondary objectives as
stated above, and each player strives to obtain the highest possible outcome given other’s choices.
 • MAXIMIN STRATEGY

A maximin strategy is a strategy in game theory where a player makes a decision that yields the 'best
of the worst' outcome. The maximin strategy of Player 1 consists of the choice whereby Player 1’s
worst-case payoff is maximized. Assuming a worst-case scenario, the maximin strategy is a
conservative choice that results in the best-case minimal payoff.

From Table 3 we can see that the minimum payoff of Iran when it decides to stop the research is 1
and when it continues to research is 3. When we maximise these minimum payoffs, we get 3 as the
maximum payoff which means that as per this strategy Iran will continue to research.

Similarly, for Israel the minimum payoff when it decides to attack is 1 and when it decides not to
attack is 2. When we maximise these minimum payoffs, we get 2 as the maximum payoff which
means that as per this strategy Israel will decide not to attack.

Therefore, from maximin strategy the optimal choice is “continue, do not attack” with a payoff of
(4,2). This solution has been highlighted in bold in the table 3.
ISRAEL Minimum of Iran

Attack Do not attack

IRAN Stop 1,3 2,4 1

Continue 3,1 4,2 3

Minimum of Israel 1 2

Table 3 : Matrix showing the maximin strategy

• PARETO EFFICIENCY

An outcome is Pareto efficient if there is no other outcome that increases at least one player's payoff
without decreasing anyone else's. Likewise, an outcome is Pareto inefficient if another outcome
increases at least one player's payoff without decreasing anyone else's.

From table 2 it can be seen that there are 2 pareto efficient outcomes:

a) (Stop, Do not attack) with a payoff of (2,4)

b) (Continue, Do not attack) with a payoff of (4,2)

These are pareto efficient because there is no other outcome that increases the payoff of at least
one player, without decreasing anyone else's payoff.

(Continue, attack) and (stop, attack) both are pareto inefficient because there exist other outcomes
i.e. (2,4) and (4,2) which increase the payoff of both the players.
CASE 2

❖ Mixed strategy

A mixed strategy is an assignment of a probability to each pure strategy. This allows for a player to
randomly select a pure strategy. Probabilities are incorporated into the concept as a way of
deviating from strictly pure strategies to mixed strategies. By using mixed strategies, we can
determine the Mixed-Strategy Nash Equilibrium.

Carrying forward the above example we now change the players’ preferences by altering their
objectives. We drop all the objectives stated in the above sections and new objectives of both the
countries have been stated in this section. The objective of both the countries, Iran and Israel, is to
minimise their loss (in other words, to maximise their gain). Both countries have two options
(strategies) available: attack and do not attack. Hence, we have two players each having two
strategies so the outcome matrix is shown in table 4 below:
ISRAEL

Attack Do not attack

IRAN Attack Outcome 1 Outcome 2

Do not attack Outcome 3 Outcome 4

Table 4 : Outcome Matrix in mixed strategy

Assumptions that are made while ordering the preferences of both the countries have been stated
explicitly below:

1. Both Iran and Israel are equally powerful and have the capability to completely destroy the
facilities of the opponent.
2. The cost of organising an attack is much less than the loss incurred when the other country
attacks.
3. If both countries don’t attack then there will be no destruction and no cost will be incurred
in organising the attack.
4. If both countries decide to attack then there will be destruction on both sides but since both
countries will be defending themselves as well, the destruction of each country in this case
will be less as compared to the case when a country is not attacking but only facing an attack
as mentioned in point number 4 below.
5. If only one country decides to attack and the other does not, then the attacker will only have
to bear the military expenditure but no cost of destruction while the other country will be
completely destroyed as it decided not to attack which in turn implies that it is not
defending itself either.

Keeping the above assumptions in mind, Iran will prefer outcome 2 and outcome 4 to outcome 1 and
outcome 3, i.e. {outcome 2, outcome 4} > {outcome 1, outcome 3}. As per assumption 4 and 5
{outcome 4} > {outcome 2} and {outcome 1} > {outcome 3}. Iran does not have any dominant
strategy in this case.
This leads to the following preference ordering for Iran: outcome 4 > outcome 2 > outcome 1 >
outcome 3.

Similarly, Israel will prefer outcome 3 and outcome 4 to outcome 1 and outcome 2, i.e. {outcome 3,
outcome 4} > {outcome 1, outcome 2}. As per assumption 4 and 5 {outcome 4} > {outcome 3} and
{outcome 1} > {outcome 2}. Israel does not have any dominant strategy in this case. This leads to
the following preference ordering for Iran: outcome 4 > outcome 3 > outcome 1 > outcome 2.

Probabilities are assigned to each outcome in table 5. The probability that Iran will attack is assumed
to be ‘p’ which means that the probability that it will not attack is ‘1-p’. Similarly, the probability that
Israel will attack is assumed to be ‘q’ which means that the probability that it will not attack is ‘1-q’.

Now assuming ordinal-level preferences, with 4 indicating the best, 3 the next-best, 2 the next
worst, and 1 the worst outcome for players (i.e. 4 > 3 > 2 > 1). The game matrix is therefore shown
below in table 5:
ISRAEL

Attack (q) Do not attack (1-q)

IRAN Attack (p) 2,2 3,1

Do not attack (1-p) 1,3 4,4

Table 5: Payoff Matrix in case of mixed strategy

o IRAN

For randomisation, Iran has to be indifference between choosing to attack and not attack. For this to
happen q should be such that;

2q +3(1-q) = q + 4(1-q)

2q + 3 – 3q = q + 4 – 4q

3 – q = 4 – 3q

2q = 1

q = 1/2

o ISRAEL

For randomisation, Israel has to be indifference between choosing to attack and not attack. For this to
happen p should be such that;

2p + 3(1-p) = 1p + 4(1-p)
 2p +3 -3p = p + 4 - 4p

3 – p = 4 – 3p

p = 1/2

thus, the mixed strategy Nash equilibrium gives us a set of probabilities from which no player will intend to deviate.
In the above case, this set of probabilities is defined as (p = 1/2, q= 1/2). So, the mixed strategy Nash equilibrium
is (1/2, 1/2).

The graphical representation of the above solution has been shown in figure 3 below:

MIXED STRATEGY NASH EQUILIBRIUM

k

a a

t
h

t
0.5
0.4
a

0.3
y
ll
i
t

ili

0.2
ba

e
p
)
0.1
q

0
a
(

0.6
r

0 0 . 1 0 . 2 0 . 3 0 . 4 0 . 5 0.6 probability
I

(0.5,0.5)
t that Iran will attack (p)

Figure 2: Graphical Representation of Mixed Strategy Nash Equilibrium

The intersection of the two lines gives us the mixed strategy Nash equilibrium of (0.5, 0.5) which is the solution to
this model.

❖ Social Implication (for case 1)

According to the solution that is common to all the above three strategies (Nash equilibrium, Pareto
efficiency and Maximin strategy) under pure strategy, Iran will continue its research program and
Israel (with a payoff of {4,2}) will not attack which fulfils the primary objective of Iran to become a
nuclear power and the secondary objective of Israel as per which it prefers no Israeli attack. The
social implication of this result is that Iran’s achievement of its nuclear-weapons goal would threaten
Israel’s existence. It would also result in a change in the international environment that would
severely undermine America’s national security along with the rest of the world as well. It must be
prevented. If Israel does not attack then there will be no hurdle in the way of Iran towards becoming
a nuclear power.