Extensive Forms

Let’s review the components of an exten-

sive form from the previous lecture and
complete our description by spelling out
the general ‘rules’.

We start from the ‘game tree’:

A tree is a set of nodes linked by edges

or branches.
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• The branches define an obvious prece-
dence order: for instance,
– node b is an immediate predecessor
of node c;
– node c is an immediate successor
of node b;
– node a is a predecessor of node c;
– node c is a successor of node a.
• Recall that nodes represent histories
of actions and branches represent ac-
tions: a history of actions (node b)
and a new action (a branch) lead to
a new history (node c).
• Each branch originating at a node rep-
resents a distinct action.
• Nodes with no successors are final or
terminal nodes.
• All other nodes are decision nodes (a,b,c,d).
• A node with no predecessor is an ini-
tial node (a).

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The following rules apply to all game trees.
• There is a unique initial node and ev-
ery other node is a successor of the
initial node:

• Immediate predecessors are unique:

3
The decision nodes are assigned to the
players,
• one player per decision node.
Information is modelled with information
sets and branches are labelled by actions:

A correct specification of the information

sets is crucial for a correct representation
of a game:

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• Distinct information sets do not over-
lap.
• Each information set contains the de-
cision nodes of only one player.

• Each branch at a node corresponds

to a distinct action and has a distinct
label.
• If an information set has k decision
nodes an action is represented by k
branches, one for each node. Hence,
the same number of branches must
originate from any node in the same
information set.

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Finally, we assign the payoffs of the play-
ers to the terminal nodes:

The first number is player 1’s payoff and

the second is player 2’s payoff.

Payoffs are “utilities” and players are ex-

pected utility maximisers. We will see
later how players choose. Payoffs are not
necessarily ‘money’ although in many ap-
plications we will assume that they are.

The next question is crucial: how do play-

ers play an extensive form game?

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 Playing the Game: Strategies

Players play a game by choosing their strate-

gies. A strategy for a player is a complete
contingent plan of action. Consider an
earlier example:

NB: Decision nodes are smaller and final

nodes no longer drawn (they are located
where the payoffs are). Players are la-
belled only by a number.

The information set of player 1 is A1 and

the information sets of player 2 are A2, B2, C2.
Let’s see what a complete contingent plan
of action looks like for player 2.
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It should specify:
1. Whether to enter the market: a choice
at A2.
2. What to do should player 1 not invest:
a choice at B2.
3. What to do should player 1 invest: a
choice at C2.
A strategy for a player specifies the ac-
tions that a player takes at each of the
player’s information sets.

Player 1 has two possible strategies:

• NV at A1;
• IV at A1.
Player 2 has eight possible strategies. Some
examples:
• IN at A2, IV at B2, NV at C2;
• IN at A2, IV at B2, IV at C2;
• IN at A2, NV at B2, IV at C2;
• OUT at A2, IV at B2, NV at C2;
• etc...
Something is odd here. Take the fourth
strategy of player 2.
• It takes the action OUT and yet spec-
ifies what actions to take after IN.
We will see later why it is important to
specify actions also at information sets
that are not reached when a strategy is
actually carried out.
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Now consider the modification where the
investment choices are not observable:

The information set of player 1 is A1 and

the information sets of player 2 are A2, B2.

Player 1 has again two strategies:

• NV at A1;
• IV at A1.
Player 2 has four strategies:
• IN at A2, NV at B2;
• IN at A2, IV at B2;
• OUT at A2, NV at B2;
• OUT at A2, IV at B2;
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We will sometimes write strategies as vec-
tors. For instance, we will abbreviate

OUT at A2, IV at B2
as (OUT, IV). Each component of the
vector corresponds to an information set:
A2 B2
(OUT, IV).
It is important that the assignment of
vector components to information sets is
consistent throughout. In the earlier ex-
ample, we can write player 2’s strategy

IN at A2, IV at B2, IV at C2
as (IN, IV, IV) where again each compo-
nent of the vector corresponds to an in-
formation set:
A2 B2 C2
(IN, IV, IV).
When actions are labelled by only one let-
ter we will sometimes simplify the nota-
tion further. Consider for instance,

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We will sometimes write a strategy for
player 2 such as “L at A2, R at B2” simply
as LR.

The strategy space or the strategy set

of a player contains all the possible strate-
gies of that player. In this example, the
strategy set of player 2, denoted by S2, is

S2 = {LL, LR, RL, RR}.

Similarly, the strategy set of player 1 is

S1 = {L, R}.
Consider an example from the textbook
with 3 players:

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The strategy set of a generic player i will
be denoted by Si, for i = 1, 2, ...., n, where
n is the number of players. A generic
strategy for player i will be denoted by si,
that is, (recall from math courses that ‘∈’
means ‘is an element of the set’)
s i ∈ Si .
A strategy profile assigns a strategy to
every player. A strategy profile s is then
s = (s1, s2, ..., sn)
A strategy profile specifies how the play-
ers play the game.
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For example, the profile s = (U, BC, T P )
in the previous example tells us that player
1 plays U , player 2 plays BC, player 3
plays T P or

s1 = U, s2 = BC, s3 = T P.
Since strategy profiles describe the possi-
ble way a game is played, they will ulti-
mately be the central object in our anal-
ysis: how do we expect players to play a
game?

The set of all strategy profiles is S, that

is,
S = S1 × S2 × ... × Sn.
NB: × denotes the Cartesian product. For
instance, if n = 2, S1 = {A, B} and S2 =
{C, D}

S = S1 × S2 = {A, B} × {C, D} =

{(A, C), (A, D), (B, C), (B, D)}

The Cartesian product contains all possi-

ble combinations of {A, B} and {C, D}.

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 The Normal Form

Consider the strategy profile (R, RL) for

the game

• If this strategy profile is played, player

1 receives 10 and player 2 receives 0.
Let’s try a few more strategy profiles:
• If the players play the profile (L, RL),
player 1 receives 10 and player 2 re-
ceives 0.
• If they play (L, LL), player 1 receives
0 and player 2 receives 10.
• And so on.
We can list all the strategy profiles and
the corresponding payoffs as follows:
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 LL LR RL RR
L 0,10 0,10 10,0 10,0
R 10,0 0,10 10,0 0,10

• The rows list player 1’s strategies, the

columns player 2’s strategies.
• The corresponding payoffs are in the
cells.
• The first payoff is player 1’s payoff,
the second is player 2’s payoff.
This is the normal form representation
of the above extensive form. The normal
form is obtained from the extensive form
by listing:
• The strategies of the players;
• The payoffs corresponding to each strat-
egy profile.
The normal form is another, more con-
densed way of describing a strategic set-
ting. In our analysis, we will use both
the extensive form and the normal form
to describe strategic interaction.

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Let’s consider some more examples. If we
modify the information structure in the
previous example by assuming that player
2 does not observe the choice of player
1, the extensive form changes (new nota-
tion: information sets are labelled by the
player they belong to):

The normal form also changes:

L R
L 0,10 10,0
R 10,0 0,10

Different information structures yield different

normal forms even if the nodes and the
branches of the game tree are the same.
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 Consider one of the previous games with
entry and investments:

The normal form is:

(OUT,NV) (OUT,IV) (IN,NV) (IN,IV)

NV 20,6 20,6 10,10 3,9
IV 20,6 20,6 9,3 4,4

Note how player 2’s choice OUT, which

terminates the game immediately, appears
in the normal form as strategies ((OUT,IV)
and (OUT,NV)) for player 2 that yield
payoffs that are independent of the strate-
gies of player 1.
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Let’s review how we derive the normal
form from an extensive form. Learning
to do it correctly is crucial.

Suppose we have n players.

1. For each player i we find the strategy
set Si.
2. For each strategy profile s ∈ S, or,
with equivalent notation,

(s1, s2, ..., sn) ∈ S1 × S2 × ... × Sn

we find the payoff of each player i,
which we will denote by

ui(s).
To summarise, a game in normal form
consists of:
1. A set of players {1, 2, ..., n}.
2. A strategy set Si for each player i,
i = 1, 2, ..., n.
3. A payoff function ui : S → R for each
player i, i = 1, 2, ..., n, that assigns a
payoff to player i for each strategy
profile s ∈ S.
When we have two players, we can repre-
sent strategies and payoffs with a ‘table’
or, more precisely, a payoff matrix.
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In the previous example in which

LL LR RL RR
L 0,10 0,10 10,0 10,0
R 10,0 0,10 10,0 0,10

we have 2 players, that is n = 2,

S1 = {L, R}.

S2 = {LL, LR, RL, RR}.

and
u1(L,LL) = 0
u2(L,LL) = 10
u1(L,LR) = 0
u2(L,LR) = 10
............

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One final observation. Different extensive
forms can have the same normal form.

Consider the following example from the

textbook:

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