Incomplete Information Games: Examples

Instructor: Ankush Garg, JSGP

1. Prisoners’ Dilemma with a ‘nice’ person

a. Two players, P1 and P2

b. Let’s denote the type of P1 as 𝑡1 and type of P2 as 𝑡2
c. P1 is a regular (R) type i.e., 𝑡1 ∈ {𝑅} while player 2 could be either regular (R)
type or nice (N) type i.e., 𝑡2 ∈ {𝑅, 𝑁}
d. The following payoff matrices represent the preferences of each player and
each type

P2 P2
C D C D
P1 C 5, 5 0, 10 P1 C 5, 10 0, 0
D 10, 0 2, 2 D 10, 5 2, 2

Game RR (p) Game RN (1-p)

e. Notice that when both players are regular type (Game RR), they play usual
Prisoners’ Dilemma game.
f. When a regular type is paired against a nice type (Game RN), it is no longer
the Prisoners’ Dilemma game – a nice type prefers to cooperate than defect.
g. We assume that P2 knows its own type, i.e., knows when they are playing RR
game and when they are playing RN game.
h. However, P1 does not know whether it is paired against regular type or nice
player of P2. In other words, P1 does not know whether they are playing RR
game or RN game
i. In the absence of complete knowledge, P1 has belief that with probability p it
is paired against regular type of P2 and with probability (1-p) against nice
type of P2
j. This belief of P1 is assumed to be common knowledge – not only P1 has these
beliefs, P2 knows that P1 has these beliefs, P1 knows that P2 knows that P1
has these beliefs, P2 knows that P1 knows that P2 knows that P1 has these
beliefs and so on.
k. We denote the strategy (𝑠𝑖 ) of each player as
For P1: 𝑠1 ∈ 𝑆1 = {𝐶, 𝐷}
For P2: 𝑠2 ∈ 𝑆2 = {𝐶(𝑅), 𝐶(𝑁); 𝐶(𝑅), 𝐷(𝑁); 𝐷(𝑅), 𝐶(𝑁); 𝐷(𝑅), 𝐷(𝑁)}
l. Notice that we have written strategy of player 2 as ‘type dependent strategy’
– For eg, a strategy 𝐶(𝑅), 𝐷(𝑁) means that P2 will play C when it is R type (in
RR game) and will play D when it is N type (in RN game).
m. Type dependent strategy is the standard way of writing strategies in
incomplete information games
n. The solution concept for incomplete static games is Bayesian Nash
Equilibrium (BNE). A strategy profile is a BNE is every type of every player is
playing a best response against the strategies of other players, given the
beliefs such that the beliefs are derived using Bayes’ rule, wherever
applicable.
o. In this example, a strategy profile (𝑠1 ; 𝑠2 (𝑅), 𝑠2 (𝑁)) is a BNE if
i. 𝑠1 is the best response of P1 against the type dependent strategy,
(𝑠2 (𝑅), 𝑠2 (𝑁)) of P2, given the beliefs (𝑝, 1 − 𝑝)
ii. each type of P2 is playing a best response against strategy 𝑠1 of P1
p. Let’s list down the best responses of each player:
i. Best response of P2 is written as 𝐵𝑅2 (𝑡2 , 𝑠1 ). Then
- 𝐵𝑅2 (𝑅; 𝐶) = 𝐷
- 𝐵𝑅2 (𝑅; 𝐷) = 𝐷
- 𝐵𝑅2 (𝑁; 𝐶) = 𝐶
- 𝐵𝑅2 (𝑁; 𝐷) = 𝐶

ii. Best response of P1 is written as 𝐵𝑅1 (𝑠2 (𝑅), 𝑠2 (𝑁); (𝑝, 1 − 𝑝)). Then
- 𝐵𝑅1 (𝐶(𝑅), 𝐶(𝑁); (𝑝, 1 − 𝑝)) = D
This is because, 𝐸𝑈1 (𝐶) = 5𝑝 + 5(1 − 𝑝)
𝐸𝑈1 (𝐷) = 10𝑝 + 10(1 − 𝑝)
Since expected payoff from playing D is strictly higher, P1 will chose D.

Similarly,
- 𝐵𝑅1 (𝐷(𝑅), 𝐶(𝑁); (𝑝, 1 − 𝑝)) = D
This is because, 𝐸𝑈1 (𝐶) = 0𝑝 + 5(1 − 𝑝)
𝐸𝑈1 (𝐷) = 10𝑝 + 10(1 − 𝑝)
Since expected payoff from playing D is strictly higher, P1 will chose D.

We can keep going in this manner to derive all the best responses for P1.
However, notice that playing D is the dominant strategy of P1 in both the
state games RR and RN. Hence, no matter what beliefs P1 holds about the
two state games, its best response is always D. Hence,

𝐵𝑅1 (𝑠2 (𝑅), 𝑠2 (𝑁); (𝑝, 1 − 𝑝)) = D for all (𝑠2 (𝑅), 𝑠2 (𝑁)) ∈ 𝑆2

q. Writing BNE
i. (D; D(R), C(N)) is the unique BNE of the game
ii. As argued earlier, D is the dominant strategy of P1 on both state
games and C(N) is the dominant action of P2 when it is N type.
iii. Moreover, D(R) is the best response of P2 against D of P1 when P2 is
regular type.
iv. Hence, in the above strategy profile, each type of each player is
playing a best response.
2. Investment Game (source: Prof. Levent Kockesen, Koc University)

a. You (player 1) and another investor (player 2) have a deposit of $100 each in a fund
b. If the fund manager is a good investor, you will each get $150 at the end of the year.
If not, you lose your money
c. You can try to withdraw your money now but the bank has only $100 cash
i. If only one tries to withdraw she gets $100
ii. If both try to withdraw, they each can get $50
d. You believe that the manager is good with probability q – this is common knowledge
e. Player 2 knows whether the manager is good or bad
f. We model the knowledge of player 2 as her type i.e. 𝑡2 ∈ {𝐺, 𝐵}
g. You and player 2 simultaneously decide whether to withdraw (W) or not (N)
h. The payoffs can be summarized as follows

P2 P2
W N W N
P1 W 50, 50 100, 0 P1 W 50, 50 100, 0
N 0, 100 150, 150 N 0, 100 0, 0
Good (q) Bad (1-q)

i. Notice that the state game ‘Good’ has two pure strategy Nash equilibrium
viz., (W, W) and (N, N). While the state game ‘Bad’ has unique dominant
strategies Nash equilibrium viz., (W, W)
j. In other words, we can write best responses of player 2, 𝐵𝑅2 (𝑡2 ; 𝑠1 ) in the
following way:
- 𝐵𝑅2 (𝐺; 𝑊) = 𝑊
- 𝐵𝑅2 (𝐺; 𝑁) = 𝑁
- 𝐵𝑅2 (𝐵; 𝑊) = 𝑊
- 𝐵𝑅2 (𝐵; 𝑁) = 𝑊

k. Notice that for player 2, action N is dominated by W when she is B type.

Using rationalizability, we only derive best responses of player 1 against
those strategies of player 2 in which she is choosing W when 𝑡2 = 𝐵.
l. Best response of P1 is written as 𝐵𝑅1 (𝑠2 (𝐺), 𝑠2 (𝐵); (𝑞, 1 − 𝑞))

- 𝐵𝑅1 (𝑊(𝐺 ), 𝑊(𝐵 ); (𝑞, 1 − 𝑞)) = W for all q

This is because, 𝐸𝑈1 (𝑊) = 50𝑞 + 50(1 − 𝑞) = 50

𝐸𝑈1 (𝑁) = 0𝑞 + 0(1 − 𝑞) = 0
 𝑁 𝑖𝑓 𝑞 > 1/2
- 𝐵𝑅1 (𝑁(𝐺), 𝑊(𝐵); (𝑞, 1 − 𝑞)) = { 𝑊 𝑖𝑓 𝑞 < 1/2
{𝑊, 𝑁} 𝑖𝑓 𝑞 = 1/2

This is because, 𝐸𝑈1 (𝑊) = 100𝑞 + 50(1 − 𝑞) = 50 + 50𝑞

𝐸𝑈1 (𝑁) = 150𝑞 + 0(1 − 𝑞) = 150𝑞

m. There are two Bayesian Nash equilibria:

i. (𝑊; 𝑊(𝐺), 𝑊(𝐵)), for all 𝑞. This is a pooling equilibrium.
ii. (𝑁; 𝑁(𝐺), 𝑊(𝐵)), for 𝑞 ≥ 1/2. This is a separating equilibrium.