Lecture 5 & 6

Dominance Solvability & Nash

Equilibirum
 Identifying Dominant Strategies

• Sometimes in a matrix game, a player will have a strategy that, given

all of the resulting outcomes, would not be worth playing.

• Such a strategy would not be worth playing if it is never better and

sometimes worse than some other strategy, regardless of the
strategies of other players.

• For a given player, strategies that are never better and sometimes
worse than other strategies are called dominated strategies. (We can
think of this as equal or worse than all of the other strategies.)

• On the other hand, a dominant strategy is one that is sometimes

better and never worse than all other strategies, regardless of the
strategies of the other players. (We can think of this as equal or
better than all of the other strategies.)
 Example 1

• Does either player have a dominant strategy in the game below?

player 2 For player 1, Z is a dominant strategy.

A B
This is because strategy Z is always better
X 0,0 3,3 than either of the other two strategies.

player 1 Y -5,-5 1,1

Because Z is dominant, the other strategies
must be dominated.
Z 1,1 6,6
We can also say that, for player 1, strategy X
dominates strategy Y.

For player 2, strategy B is dominant because B is never

worse and, in this case, always better than strategy B
from the standpoint of minimizing payoff values.

Because B is dominant, then A is dominated.

 Example 3

• Dominant – better than or equal to any other strategy.

• Dominated – worse than or equal to any other strategy.

player 2

A B C Does either player have a dominant strategy

for this game ?
X -3,-3 -2,-2 -1,-1
Player 1 has no dominant and no dominated
player 1,1 -4,-4 3,3 strategy.
Y
1
-1,-1 0,0 -5,-5 Why?
Z
 Identifying Dominant Strategies

• If a player has two strategies,

– if one strategy is dominant, then the other is dominated.
– if neither is dominant, then neither is dominated.

• If a player has three or more strategies,

– if one strategy is dominant, then all others are dominated.
– If one strategy is dominated, there may or may not be dominant
strategies.
 Dominance
• Strict
• Weak
Dominant Strategy Equilibrium
If every player has a (strictly or weakly) dominant strategy,
then the corresponding outcome is a (strictly or weakly)
dominant strategy equilibrium.

H L
H 10,10 2,15
L 15,2 5,5
L strictly dominates H
(L,L) is a strictly dominant strategy equilibrium
A reasonable solution concept
It only demands the players to be rational
It does not require them to know that the others are rational too
But it does not exist in many interesting games
Undominated Strategy
A strategy is said to be an undominated strategy if it is
not dominated by any other strategy
Dominated Strategies
A strategy si# is dominated by another strategy si’, if the
latter does at least as well as si# against every strategy
of the other players, and against some it does strictly
better, such that
πi(si’, s-i) ≥ πi(si#, s-i) for all s-i
πi(si’, s-i^) > πi(si#, s-i^) for some s-i^
A dominant strategy is a special kind of undominated
strategy.

In every game there has to be at least one undominated

strategy. Why?
 Price Matching
Toys“R”us & Wal-Mart
High Low Match
High 10,10 2,15 10,10
Low 15,2 5,5 5,5
Match 10,10 5,5 10,10

High is weakly dominated and Toys“R”us is rational

◮ Toys“R”us should not use High
High is weakly dominated and Wal-Mart is rational
◮ Wal-Mart should not use High
Each knows the other is rational
◮ Toys“R”us knows that Wal-Mart will not use High
◮ Wal-Mart knows that Toys“R”us will not use High
◮ This is where we use common knowledge of rationality
Price Matching
Therefore we have the following “effective” game
Toys“R”us Wal-Mart
Low Match
Low 5,5 5,5
Match 5,5 10,10
Low becomes a weakly dominated strategy for both
Both companies will play Match and the prices will be high
The above procedure is known as Iterated Elimination of Dominated
Strategies (IEDS)

To be a good strategist try to see the world from the perspective of

your rivals and understand that they will most likely do the same
Iterated Elimination of Dominated Strategies
Common knowledge of rationality justifies eliminating
dominated
strategies iteratively
This procedure is known as Iterated Elimination of
Dominated Strategies
If every strategy eliminated is a strictly dominated strategy
◮ Iterated Elimination of Strictly Dominated Strategies
If at least one strategy eliminated is a weakly dominated
strategy
◮ Iterated Elimination of Weakly Dominated Strategies
 Iterated Elimination of Dominated Strategies
It is irrational for player 1 to play Down, because it is a dominated strategy. The
reason is that by playing any strategy that dominates this strategy, she can
guarantee herself at least as much if not higher payoff. But if were known to
player 2 that 1 will never play down then right looks dominated to him. But then
the row player should not worry about player 2 playing left!

2 Left Right
1
Up 1,1 0,1
Middle 0,2 1,0
Down 0,-1 0,0
• Chain of Logic
Player 1 is rational in that she never plays a dominated
strategy and that is known to player 2.
Hence in round 2, if player 2 has a dominated strategy,
he will never play it and player 1 knows that.
Player 1 only considers the payoffs, in the event that
player 2 plays an undominated strategy….
 Discussion
• Layers of rationality- logic begins to
appear a little shaky as the rounds
increase.
• Order of elimination matters.
• No existence
 Practice Questions
• Consider the following simple auction scenario. Two individuals, players 1 and player
2, are competing in an auction to obtain a valuable object. Each player bids in a
sealed envelope, without knowing the bid of the other player. The bids must be in
multiples of $100 and the maximum that they can bid is $500. The object is worth
$400 to player 1 and $300 to player 2. The highest bidder wins the object. In case of
a tie, Player 1 gets the object. The winner pays a price p to be specifed below. So, if
the value of the object for player i is x and player i wins the object her payoff is x - p:
If she does not win the object her payoff is zero.
• Case 1 (First Price Auction): In this case, the winner of the object pays whatever she
bids.
• Answer the following questions for both Case 1 and Case 2:
• (a) Write down the strategic form.
• (b) Is there a strictly dominant strategy equilibrium of this game? Explain.
• (c) Is there a weakly dominant strategy equilibrium of this game? Explain.
• (d) What are the action profiles that survive IEDS
• (e Is the game dominance solvable?
 Practice Questions
1. Two television networks, let’s call them A and B, are battling for shares of total
viewers. Each network aims to maximize its viewer share because the higher the viewer share,
the greater the amount of money the network can make by selling advertising time on that
program. Each network can show either a sitcom (S) or a news event (N), and the networks
make their programming decisions independently and simultaneously. A has an advantage in
sitcoms: if both networks show sitcoms, then A gets a 55% viewer share and B a 45% share.
B has an advantage in news: if both networks show news, then B gets a 55% share and A a
45% share. If A shows news while B shows a sitcom, the shares are evenly split; if A shows a
sitcom while B shows news, the shares are 52% and 48%, respectively.

(a) Draw a 2×2 payoff matrix for this interaction, clearly labelling the players, their
strategies, and the payoffs.
(b) Is there a dominant strategy equilibrium?
(c) What outcomes does the iterated elimination of dominated strategies lead to?
 Mixed Strategy Dominance
1\2 L R
U 4,1 0,2
M 0,0 4,0
D 1,3 1,2

Is there dominance in pure strategies?

Check for a mixed strategy dominance
 Guidelines
• (1/2, ½,0)
• (1/3, 2/3,0)
Whenever you are looking for a mixed
strategy that dominates a pure strategy,
look for alternating patterns of large and
small numbers.
 Another Example
1\2 A B C X
U 1,0 4,2 2,4 3,1
M 2,4 2,0 2,2 2,1
D 4,2 1,4 2,0 3,1

Check for pure strategy dominance

Check for a mixed strategy dominance
 Best Response Strategies
A strategy a is called a best response strategy against
the other player’s known strategy, if it does better than
any of your other strategies against this known strategy.
It only pays to play your best response against a strategy
you believe your opponent is about to play.

A strategy si* is a best response to a strategy vector s-i*

of the other players if:
πi(si*, s-i* ) ≥ πi(si#, s-i* ) for all si
In other words si* is a dominant strategy in a weak sense
since it is the best strategy to play provided the others
play s-i*
 1\2 A B
A 1,3 0,0
B 0,0 3,1

• BR1(A)={A}
• BR1(B)={B}
 Calculating the Best Response
1\2 x y z
a 3,5 3,3 0,3
b 0,3 8,2 1,2
c 5,4 2,2 2,3
 How to write down the Best Response

• BRi(θ-i)= {si}

• θ2=(1/3,1/3,1/3)
• U1(a, θ2)=3*1/3 + 3*1/3 + 0=2
• U1(b, θ2)=0 + 8/3 + 1/3=3
• U1(c, θ2)=9/3=3
• BR1(θ2)= {b,c}
 Relationship between BR and dominance

1\2 M Q
X 3,4 7,0
Y 9,3 4,4
Z 0,1 8,2

Check for pure strategy dominance

Check for mixed strategy dominance

Set up a probability expected payoff for P1

1\2 M Q
X 1,4 1,3
Y 3,6 0,1
Z 0,3 3,2
 Nash equilibrium
• A Nash equilibrium is a strategy pair
where no player has an incentive to
deviate given what the other player is
playing.
In a Nash Equilibrium:
Each player must be playing a best
response against a conjecture.
The conjectures must be correct. Hence
no player has an incentive to change his
strategy.
 Game of Chicken
There are two providers of satellite radio: XM and Sirius
XM is the industry leader with 5 million subscribers; Sirius has 2.2 million
In the long-run the market can sustain only one provider

Sirius
Stay Exit
Stay −200,−200 300,0
Exit 0,300 0,0
Is there a dominated strategy?
What are the likely outcomes?
Could (Stay, Stay) be an outcome?
If XM expects Sirius to exit, what is its best strategy (best response)?
If Sirius expects XM to stay what is its best response?
(Stay, Exit) is an outcome such that
◮ Each player best responds, given what she believes the other will do
◮ Their beliefs are correct
It is a Nash equilibrium
 Questions
1\2 X Y Z
J 5,6 3,7 0,4
K 8,3 3,1 5,2
L 7,5 4,4 5,6
M 3,5 7,5 3,3