Game Theory

Vivekananda Mukherjee
Department of Economics and Finance
BITS-Pilani, Hyderabad Campus
Lecture 3
Summary

• Aspects of modeling of games in ‘Game Theory’

Theory of rational choice

1. Actions
2. Preferences and payoff functions

Preferences are ordinal, self-regarding.

The action chosen by a player is at least as good, according to her preferences, as
every other available action.
Summary (contd.)
• Games of complete information:
Each player’s payoff function is common knowledge among all the players

• Games of incomplete information:

Some player is uncertain about another player’s payoff function.
Static games vs. Dynamic Games

• Static games: simultaneous-move games

• Dynamic games: sequential-move games
……games of perfect information
……games of imperfect information

Repeated games ………finitely repeated games

……..infinitely repeated games
Normal-form representation of a game

specifies
(1) the players in the game
(2) the strategies available to each player
(3) the payoffs received by each player for each combinations that could be chosen
by the players

Definition.
The normal-form representation of an -player game specifies the players’ strategy
spaces ,………., and their payoff functions ….., We denote this game by ,………., ;
…..,
Actions vs. Strategies

• Are the same in static games

• Different in dynamic games
……A strategy for a player is a complete plan of action – it
specifies a feasible action for the player in every contingency in
which the player might be called to act.
Static games of complete information
• Normal form representation
2 player case
;
for

player case
,………., ; …..,
for
Toy game 1: Prisoner’s Dilemma

Prisoner 2
NC C
NC -1, -1 -9, 0
Prisoner 1
C 0, -9 -6, - 6
Preference of player 1: (C,NC) (NC,NC) (C,C) (NC,C)
Preference of player 2: (NC,C) (NC,NC) (C,C) (C,NC)
There are gains from cooperation (each player prefers that both players choose NC
than they both choose C) but each player has an incentive to “free ride” (choose C)
whatever the other player does.
Prisoner’s dilemma (contd.)
Network Engineering

Router B
High Power Low Power
High Power 5, 5 15,2
Router A
Low Power 2,15 10,10