Game Theory and its

Applications

SARANI SAHABHATTACHARYA, HSS

ARNAB BHATTACHARYA, CSE

07 JAN, 2009
 Prisoner’s Dilemma
2

 Two suspects arrested for a crime

 Prisoners decide whether to confess or not to confess
 If both confess, both sentenced to 3 months of jail
 If both do not confess, then both will be sentenced to
1 month of jail
 If one confesses and the other does not, then the
confessor gets freed (0 months of jail) and the non-
confessor sentenced to 9 months of jail
 What should each prisoner do?

Game Theory Jan 07, 2009

 Battle of Sexes
3

 A couple deciding how to spend the evening

 Wife would like to go for a movie
 Husband would like to go for a cricket match
 Both however want to spend the time together
 Scope for strategic interaction

Game Theory Jan 07, 2009

 Games
4

 Normal Form representation – Payoff Matrix

Prisoner 2

Confess Not Confess

Confess -3,-3 0,-9
Prisoner 1
Not Confess -9,0 -1,-1

Husband
Movie Cricket
Wife
Movie 2,1 0,0
Cricket 0,0 1,2

Game Theory Jan 07, 2009

 Nash equilibrium
5

 Each player’s predicted strategy is the best response

to the predicted strategies of other players
 No incentive to deviate unilaterally
 Strategically stable or self-enforcing
Prisoner 2
Confess Not Confess
Confess -3,-3 0,-9
Prisoner 1
Not Confess -9,0 -1,-1

Game Theory Jan 07, 2009

 Mixed strategies
6

 A probability distribution over the pure strategies of

the game
 Rock-paper-scissors game
 Each player simultaneously forms his or her hand into the
shape of either a rock, a piece of paper, or a pair of scissors
 Rule: rock beats (breaks) scissors, scissors beats (cuts) paper,
and paper beats (covers) rock
 No pure strategy Nash equilibrium
 One mixed strategy Nash equilibrium – each player
plays rock, paper and scissors each with 1/3
probability
Game Theory Jan 07, 2009
 Nash’s Theorem
7

 Existence
 Any finite game will have at least one Nash equilibrium
possibly involving mixed strategies
 Finding a Nash equilibrium is not easy
 Not efficient from an algorithmic point of view

Game Theory Jan 07, 2009

 Dynamic games
8

 Sequential moves
 One player moves

 Second player observes and then moves

 Examples
 Industrial Organization – a new entering firm in the market
versus an incumbent firm; a leader-follower game in quantity
competition
 Sequential bargaining game - two players bargain over the
division of a pie of size 1 ; the players alternate in making
offers
 Game Tree

Game Theory Jan 07, 2009

 Game tree example: Bargaining
Period 2:
B offers x2.
(x1,1-x1) A responds. (x3,1-x3)

1 Y 1 1 Y

x1 x3
N
B B (0,0)
N
A B x2 A A
N

Y
0 0 0
Period 1: Period 3:
A offers x1. (x2,1-x2) A offers x3.
B responds. B responds.
 Economic applications of game theory

 The study of oligopolies (industries containing only

a few firms)
 The study of cartels, e.g., OPEC
 The study of externalities, e.g., using a common
resource such as a fishery
 The study of military strategies
 The study of international negotiations
 Bargaining
 Auctions
11

 Games of incomplete information

 First Price Sealed Bid Auction
 Buyers simultaneously submit their bids

 Buyers’ valuations of the good unknown to each other

 Highest Bidder wins and gets the good at the amount he bid

 Nash Equilibrium: Each person would bid less than what the good
is worth to you
 Second Price Sealed Bid Auction
 Same rules

 Exception – Winner pays the second highest bid and gets the good

 Nash equilibrium: Each person exactly bids the good’s valuation

Game Theory Jan 07, 2009

 Second-price auction
12

 Suppose you value an item at 100

 You should bid 100 for the item
 If you bid 90
 Someone bids more than 100: you lose anyway

 Someone bids less than 90: you win anyway and pay second-price

 Someone bids 95: you lose; you could have won by paying 95

 If you bid 110

 Someone bids more than 11o: you lose anyway

 Someone bids less than 100: you win anyway and pay second-price

 Someone bids 105: you win; but you pay 105, i.e., 5 more than
what you value
Game Theory Jan 07, 2009
 Mechanism design
13

 How to set up a game to achieve a certain outcome?

 Structure of the game

 Payoffs

 Players may have private information

 Example
 To design an efficient trade, i.e., an item is sold only when
buyer values it as least as seller
 Second-price (or second-bid) auction
 Arrow’s impossibility theorem
 No social choice mechanism is desirable

 Akin to algorithms in computer science

Game Theory Jan 07, 2009
 Inefficiency of Nash equilibrium
14

 Can we quantify the inefficiency?

 Does restriction of player behaviors help?
 Distributed systems
 Does centralized servers help much?

 Price of anarchy
 Ratio of payoff of optimal outcome to that of worst possible
Nash equilibrium
 In the Prisoner’s Dilemma example, it is 3

Game Theory Jan 07, 2009

 Network example
15

C(x) = 1

C(x) = x
 Simple network from s to t with two links
 Delay (or cost) of transmission is C(x)

 Total amount of data to be transmitted is 1

 Optimal: ½ is sent through lower link
 Total cost = 3/4

 Game theory solution (selfish routing)

 Each bit will be transmitted using the lower link

 Not optimal: total cost = 1

 Price of anarchy is, therefore, 4/3

Game Theory Jan 07, 2009
 Do high-speed links always help?
16

C(x) = x C(x) = 1 C(x) = x C(x) = 1

C(x) = 0
C(x) = 1 C(x) = x C(x) = 1 C(x) = x

 ½ of the data will take route s-u-t, and ½ s-v-t

 Total delay is 3/2
 Add another zero-delay link from u to v
 All data will now switch to s-u-v-t route
 Total delay now becomes 2
 Adding the link actually makes situation worse

Game Theory Jan 07, 2009

 Other computer science applications
17

 Internet
 Routing
 Job scheduling
 Competition in client-server systems
 Peer-to-peer systems
 Cryptology
 Network security
 Sensor networks
 Game programming

Game Theory Jan 07, 2009

 Bidding up to 50
18
 Two-person game
 Start with a number from 1-4
 You can add 1-4 to your opponent’s number and bid
that
 The first person to bid 50 (or more) wins
 Example
 3, 5, 8, 12, 15, 19, 22, 25, 27, 30, 33, 34, 38, 40, 41, 43, 46, 50
 Game theory tells us that person 2 always has a
winning strategy
 Bid 5, 10, 15, …, 50
 Easy to train a computer to win
Game Theory Jan 07, 2009
 Game programming
19

 Counting game does not depend on opponent’s choice

 Tic-tac-toe, chess, etc. depend on opponent’s moves
 You want a move that has the best chance of winning
 However, chances of winning depend on opponent’s
subsequent moves
 You choose a move where the worst-case winning
chance (opponent’s best play) is the best: “max-min”
 Minmax principle says that this strategy is equal to
opponent’s min-max strategy
 The worse your opponent’s best move is, the better is your move

Game Theory Jan 07, 2009

 Chess programming
20

 How to find the max-min move?

 Evaluate all possible scenarios
 For chess, number of such possibilities is enormous
 Beyond the reach of computers

 How to even systematically track all such moves?

 Game tree

 How to evaluate a move?

 Are two pawns better than a knight?

 Heuristics
 Approximate but reasonable answers

 Too much deep analysis may lead to defeat

Game Theory Jan 07, 2009
 Conclusions
21

 Mimics most real-life situations well

 Solving may not be efficient
 Applications are in almost all fields
 Big assumption: players being rational
 Can you think of “unrational” game theory?

 Thank you!
 Discussion

Game Theory Jan 07, 2009