Decision & Game Theory

Chapter 6
Introduction to Game Theory

Sonia REBAI
Tunis Business School
University of Tunis
What is Game Theory?
ü Game theory is a mathematical discipline that studies the behaviors and
decisions of agents placed in a situation of interdependence.

ü The main originality of game theory is that the players are aware not only
of their own goals but also of those of other protagonists.
ü Decision-makers are supposed to be rational and to pursue exogenous
objectives
ü Game theory concerns social problems for which you are not the only
person who makes a decision. You interact with others.

ü You need to think about what is best for you that depends on what
others do. Such a situation is called a strategic situation.

ü Game theory helps in examining and predicting how people behave in a

strategic situation.

ü Game theory provides you a unified way for solving many kinds of
problems.
Three elements should be specified

ü Players: individuals, firms, countries, etc. A player has the ability to choose
among a set of possible actions. The specific identity of the players is
irrelevant to the game.

ü Strategies can be very simple or very complex but each is assumed to be

well-defined.

ü Payoffs: The final returns of the players at the end of the game. They are
measured in terms of utility obtained by the player.
ü The goal of each player is to maximize his utility, which depends on his
decisions (strategies) and that of all other players.

ü Each player is free to choose his decision, but not that of the others.

ü They take into account the knowledge they have or the anticipations they
make of the behavior of other decision-makers.

ü Players are supposed to be rational.

Types of Games
Games are generally divided into two categories:

✓ Cooperative games: players can make irrevocable agreements with each

other.

✓ Non-cooperative games:
• Either it is assumed that players can not make irrevocable agreements
before engaging in the action (impossibility of communicating or a
prohibition of consultation between competitors).
 • or it is assumed that the players are in no way compelled to take any
action respecting the agreements that they may have previously
concluded between them.
Further,

✓ Sequential vs. Simultaneous moves

✓ Single Play vs. Iterated

✓ Zero vs. non-zero sum

✓ Perfect vs. Imperfect information

✓ Static vs. Dynamic
Description of Non-Cooperative Games
A non-cooperative game can be described in two ways

1. A matrix form: it consists in giving strategies and payoffs for each set of
players.

2. An extensive form: it provides an extended description of the game as a

tree revealing outcomes from each set of players’ strategies and possible
actions that each set of players can take in response to other players’
moves. This description is suitable for dynamic games or those with
incomplete information or with uncertainty.
Examples
The children’s hand game

ü Each player simultaneously makes a figure of rock, paper, or scissors

ü Outcome: Rock dominates scissors, scissors dominate paper, and paper

dominates rock. In a two-person game, player who makes dominating
figure wins the game. When both make same figure, it’s a draw and
neither player wins
 Player R
R S P
R (D,D) (W,L) (L,W)
Player F
S (L,W) (D,D) (W,L)
P (W,L) (L,W) (D,D)

Within the parentheses the first payoff is player F’s and the second is for
player R.
ü For this example sequential moves put player who moves first at a
disadvantage. The other player will always choose an action that
results in a win.

ü When players simultaneously reveal their actions, neither player has

any prior information on the actions of the other player.
Battle of the Sexes
Ø A wife and husband may either go to shopping or to a football match
• both prefer spending time together
• the wife prefers shopping and the husband prefers football

Wife Football Shopping

Husband
Football 3, 2 0, 0

Shopping 0, 0 2, 3
 Prisoners’ Dilemma

✓ Two suspects are arrested for a crime. They are

put in different rooms and being interrogated
by police force.

✓ Both players have two choices. Either to

cooperate or to defect. Cooperation means
remain silent.

✓ The prosecutor wants to extract a confession

so he offers each a deal.
✓ The Deal

• “if you defect to confess, but your companion remains silent, you will
be set free, and your companion will be harshly punished for 15
years”

• “if you both defect to confess, you will each get a ten-year sentence”

• “if both remain silent, each will get a one-year sentence”

 2 Cooperate Defect
1
Cooperate -1, -1 -15, 0

Defect 0, -15 -10, -10

Dominance
Let’s denote by

ü fi : the payoff of player i in terms of the choices of all players. It can be a

profit, an assessment of psychological satisfaction,… (In any case, a player
prefers the issues that give him the best value of fi).

ü xi : strategy of player i

ü x-i : strategies of the other players.

ü A strategy xi of the player i strictly dominates a strategy xi’ if:

f i (xi , x−i ) > f i (xi ', x−i ) for all x−i

ü A strategy xi of the player i weakly dominates a strategy xi’ if

f i (xi , x−i ) ≥ f i (xi ', x−i ) for all x−i

Equilibrium of Dominant Strategies
✓ If a player has a strictly dominant strategy, then he chooses it without
hesitation since his best choice is independent of that of the other
players.
✓ When all players have a strictly dominant strategy, an equilibrium of
dominant strategies exists that is determined without having to consider
the behavior of the other players.
✓ The existence of an equilibrium in weakly dominant strategies is almost
miraculous. In general, a player must consider other players’ strategies.
He may then reduce his set of strategies based on rational behavior.
✓ By assuming that the dominated strategies will never be played, we can
eliminate them.

✓ If this elimination process converges towards a single outcome, everyone

can unambiguously anticipate the behavior of the others. The obtained
outcome is called equilibrium by the elimination of strictly dominated
strategies.
✓ Such equilibrium only rarely exists. The elimination process often stops
while the players still have several alternatives, none of them being
strictly dominated.

✓ The process of elimination can be multiple.

✓ The process can converge to several possible outcomes according to the

order in which the eliminations succeed. But there is no reason to
assume that players follow the same order in the elimination process.
Example

Player 2
A B C
1 (4,2) (1,4) (2,2)
Player 1
2 (3,0) (1,5) (2,8)
3 (1,4) (1,4) (3,4)

² The successive elimination of the strategies 2, C, 3 and A converges

towards (1,B) whereas the successive elimination of A, 1, B and 2
converges towards (3, C).