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Extensive Form

Games
With Perfect
Information
(Theory)
Extensive Form Games with
Perfect Information
Entry Game: An incumbent faces the possibility of
entry by a challenger. The challenger may enter
or not. If it enters, the incumbent may either
accommodate or fight.

Payoff:
- Challenger: u
1
(Enter, Accommodate)=2,
u
1
(Out)=1, u
1
(Enter, Fight)=0
- Incumbent: u
2
(Out)=2, u
2
(E,A)=1, u
2
(E,F)=0
Extensive Form Games with
Perfect Information
Definition: an extensive form game consists of
the players in the game
when each player has to move
what each player can do at each of her
opportunities to move
the payoff received by each player for each
combination of moves that could be chosen by
the players.
Extensive Form Games with
Perfect Information
Extensive Form Game Tree.
Stay Out
Enter
Accommodate
Fight
Incumbent
Challenger
0,0
2,1
1,2
- Nash Equilibria?
- Solve via Backward Induction
Extensive Form Games with
Perfect Information
Normal Form (Simultaneous Move).
Accommodate Fight
Enter

Stay
Out
Challenger
Incumbent
2,1
1,2
1,2
0,0
Extensive Form Games with
Perfect Information
Normal Form (Simultaneous Move).
Accommodate Fight
Enter

Stay
Out
Challenger
Incumbent
2,1
1,2
1,2
0,0
So we have two pure strategy NE, (enter, accommodate) and (stay out, fight).
How come in the extensive form we only have one equilibrium by backward
induction ?
Extensive Form Games with
Perfect Information
Definition: A strategy for a player is a complete
plan of action for the player in every contingency
in which the player might be called to act.
Extensive Form Games with
Perfect Information
Example (160.1)
1
2
1
D
F
C
G
E
H
2,0
3,1
0,0
1,2
Strategies of Player 2: E, F
Strategies of Player 1: CG,CH,DG,DH

a strategy of any player i specifies an
action for EVERY history after which it is
player is turn to move, even for
histories that, if that strategy is followed,
do not occur.
Extensive Form Games with
Perfect Information
Nash Equilibrium: each player must act optimally
given the other players strategies, i.e., play a
best response to the others strategies.

Problem: Optimality condition at the beginning of
the game. Hence, some Nash equilibria of
dynamic games involve non-credible threats.
Extensive Form Games with
Perfect Information
Consider a game G of perfect information
consisting of a tree T linking the information sets
i 0 I (each of which consists of a single node)
and the payoffs at each terminal node of T. A
sub-tree T
i
is the tree beginning at information
set i, and a subgame G
i
is a sub-tree T
i
and the
payoffs at each terminal node T
i
.
Extensive Form Games with
Perfect Information
A Nash equilibrium of G is subgame perfect if it
specifies Nash equilibrium strategies in every
subgame of G. In other words, the players act
optimally at every point during the game.

Ie, players play Nash Equilibrium strategies in
EVERY subgame.
Extensive Form Games with
Perfect Information
Subgame Perfection
- Every subgame perfect equilibrium (SPE) is a Nash
equilibrium.

- A subgame perfect equilibrium is a strategy profile
that induces a Nash Equilibrium in every subgame.
Extensive Form Games with
Perfect Information
Example (172.1)
1
2
2
C
E
F
D
G
H
2,1
1,3
2,2
3,0
2
K J
I
1,1
1,0
Extensive Form Games with
Perfect Information
Example (172.1)
1
2
2
C
E
F
D
G
H
2,1
1,3
2,2
3,0
2
K J
I
1,1
1,0
Player 2 Optimal Strategies:
(FHK),(FIK),(GHK),(GIK)
Extensive Form Games with
Perfect Information
Example (172.1)
1
2
2
C
E
F
D
G
H
2,1
1,3
2,2
3,0
2
K J
I
1,1
1,0
Player 2 Optimal Strategies:
(FHK),(FIK),(GHK),(GIK)
Player 1 Best Responses:
(C),(C),(C or D, or E),(D)
Extensive Form Games with
Perfect Information
1
2
2
C
E
F
D
G
H
2,1
1,3
2,2
3,0
2
K J
I
1,1
1,0
Strategy Pairs:
(C,FHK), (C,FIK), (C,GHK),
(D,GHK), (E,GHK), (D,GIK)
Player 2 Optimal Strategies:
(FHK),(FIK),(GHK),(GIK)
Player 1 Best Responses:
(C),(C),(C or D, or E),(D)
Extensive Form Games with
Perfect Information
Proposition: Every finite extensive game with
perfect information has a subgame perfect
equilibrium. (173.1 in Osborne)

Extensive Form Games with
Perfect Information
Sequential Matching Pennies.

Preview of Repeated Games: Chain Store with
N opponents.