Games with Simultaneous

Moves

Nash equilibrium and normal form games

Overview
 In many situations, you will have to determine your
strategy without knowledge of what your rival is doing
at the same time
 Product design
 Pricing and marketing some new product
 Mergers and acquisitions competition
 Voting and politics
 Even if the moves are not literally taking place at the
same moment, if your move is in ignorance of your
rival’s, the game is a simultaneous game
Two classes of Simultaneous Games
 Constant sum
 Pure allocation of fixed surplus
 Variable Sum
 Surplus is variable as is its allocation
Constant sum games
 Suppose that the “pie” is of fixed size and your
strategy determines only the portion you will
receive.
 These games are constant sum games
 Can always normalize the payoffs to sum to zero
 Purely distributive bargaining and negotiation
situations are classic examples
 Example: Suppose that you are competing
with a rival purely for market share.
Variable Sum Games
 In many situations, the size and the distribution of the
pie are affected by strategies
 These games are called variable sum
 Bargaining situations with both an integrative and
distributive component are examples of variable
sum games
 Example: Suppose that you are in a negotiation with
another party over the allocation of resources. Each of
you makes demands regarding the size of the pie.
 In the event that the demands exceed the total

pie, there is an impasse, which is costly.

Nash Demand Game
 This bargaining game is called the Nash
demand game.
Constructing a Game Table
 In simultaneous move games, it is sometimes
useful to construct a game table instead of a
game tree.
 Each row (column) of the table corresponds
to one of the strategies
 The cells of the table depict the payoffs for
the row and column player respectively.
Game Table – Constant Sum Game
 Consider the market share game described
earlier.
 Firms choose marketing strategies for the
coming campaign
 Row firm can choose from among:
 Standard, medium risk, paradigm shift
 Column can choose among:
 Defend against standard, defend against
medium, defend against paradigm shift
Game Table – Payoffs
Defend Defend Defend
Standard Medium Paradigm
Standard 20% 50% 80%

Medium 60% 56% 70%

Risk
Paradigm 90% 40% 10%
Shift
Game Table – Variable Sum Game
 Consider the negotiation game described
earlier
 Row chooses between demanding small,
medium, and large shares
 As does column
Game Table – Payoffs
Low Medium High

Low 25, 25 25, 50 25, 75

Medium 50, 25 50, 50 0, 0

High 75, 25 0, 0 0, 0
Solving Game Tables
 To “solve” a game table, we will use the
notion of Nash equilibrium.
Solving Game Tables
 Terminology
 Row’s strategy A is a best response to
column’s strategy B if there is no strategy for
row that leads to higher payoffs when column
employs B.
 A Nash equilibrium is a pair of strategies that
are best responses to one another.
Finding Nash Equilibrium – Minimax
method
 In a constant sum game, a simple way to find
a Nash equilibrium is as follows:
 Assume that your rival can perfectly forecast
your strategy and seeks to minimize your
payoff
 Given this, choose the strategy where the
minimum payoff is highest.
 That is, maximize the amount of the minimum
payoff
 This is called a maximin strategy.
Constant Sum Game – Finding
Equilibrium
Defend Defend Defend Min
Standard Medium Paradigm
Standard 20% 50% 80% 20%

Medium 60% 56% 70% 56%

Risk
Paradigm 90% 40% 10% 10%
Shift

Max 90% 56% 80%

Constant Sum Game – Row’s Best
Strategy
Defend Defend Defend Min
Standard Medium Paradigm
Standard 20% 50% 80% 20%

Medium 60% 56% 70% 56%

Risk
Paradigm 90% 40% 10% 10%
Shift

Max 90% 56% 80%

Constant Sum Game – Column’s Best
Strategy
Defend Defend Defend Min
Standard Medium Paradigm
Standard 20% 50% 80% 20%

Medium 60% 56% 70% 56%

Risk
Paradigm 90% 40% 10% 10%
Shift

Max 90% 56% 80%

Constant Sum Game – Equilibrium
Defend Defend Defend Min
Standard Medium Paradigm
Standard 20% 50% 80% 20%

Medium 60% 56% 70% 56%

Risk
Paradigm 90% 40% 10% 10%
Shift

Max 90% 56% 80%

Comments
 Using minimax (and maximin for column) we
conclude that medium/defend medium is the
equilibrium.
 Notice that when column defends the medium
strategy, row can do no better than to play
medium
 When row plays medium, column can do no
better than to defend against it.
 The strategies form mutual best responses
 Hence, we have found an equilibrium.
Caveats
 Maximin analysis only works for zero or
constant sum games
Finding an Equilibrium – Cell-by-Cell
Inspection
 This is a low-tech method, but will work for all games.
 Method:
 Check each cell in the matrix to see if either side has a
profitable deviation.
 A profitable deviation is where by changing his strategy
(leaving the rival’s choice fixed) a player can improve
his or her payoffs.
 If not, the cell is a best response.
 Look for all pairs of best responses.

 This method finds all equilibria for a given game table

 But it’s time consuming for more complicated games.
Game Table – Row Analysis
Low Medium High

Low 25, 25 25, 50 25, 75

Medium 50, 25 50, 50 0, 0

High 75, 25 0, 0 0, 0

For row: High is a best response to Low

Game Table – Row’s Best Responses
Low Medium High

Low 25, 25 25, 50 25, 75

Medium 50, 25 50, 50 0, 0

High 75, 25 0, 0 0, 0
Game Table – Column Analysis
Low Medium High

Low 25, 25 25, 50 25, 75

Medium 50, 25 50, 50 0, 0

High 75, 25 0, 0 0, 0

For column: High is a best response to Low

Game Table – Column’s Best
Responses
Low Medium High

Low 25, 25 25, 50 25, 75

Medium 50, 25 50, 50 0, 0

High 75, 25 0, 0 0, 0
Game Table – Equilibrium
Low Medium High

Low 25, 25 25, 50 25, 75

Medium 50, 25 50, 50 0, 0

High 75, 25 0, 0 0, 0
Summary
 In this game, there are three pairs of mutual
best responses
 The parties coordinate on an allocation of the
pie without excess demands
 But any allocation is an equilibrium
Other Archetypal Strategic Situations
 We close this unit by briefly studying some
other common strategic situations
Hawk-Dove
 In this situation, the players can either choose
aggressive (hawk) or accommodating strategies
 From each players perspective, preferences can be
ordered from best to worst:
 Hawk – Dove
 Dove – Dove
 Dove – Hawk
 Hawk – Hawk
 The argument here is that two aggressive players
wipe out all surplus
Hawk-Dove Analysis
 We can draw the game Hawk Dove
table as:
 Best Responses:
 Reply Dove to Hawk
 Reply Hawk to Dove Hawk 0, 0 4, 1
 Equilibrium
 There are two
equilibria
 Hawk-Dove
Dove 1, 4 2, 2
 Dove-Hawk
Battle of the Sexes
 In this game, surplus is obtained only if we
agree to an action
 However, the players differ in their opinions
about the preferred action
 All surplus is lost if no agreement is reached
 There are two strategies: Value or Cost
Payoffs
 Suppose that the column player prefers the cost
strategy and row prefers the value strategy
 Preference ordering for Row:
 Value-Value
 Cost-Cost
 Anything else
 Preference ordering for Column
 Cost-Cost
 Value-Value
 Anything else
BoS Analysis
 We can draw the game Value Cost
table as:
 Best Responses:
 Reply Value to Value
 Reply Cost to Cost Value 2, 1 0, 0
 Equilibrium
 There are two
equilibria
 Value-Value
Cost 0, 0 1, 2
 Cost-Cost
Conclusions
 Simultaneous games are those where your opponent’s strategy
choice is unknown at the time you choose a strategy
 To solve a simultaneous game, we look for mutual best
responses
 This is called Nash equilibrium
 Drawing a game table is a useful way to analyze these types of
situations
 When there are many strategies, using best-response analysis
can help to determine proper strategy
 Games may have several equilibria.
 Focal points and framing effects to steer the
negotiation to the preferred equilibrium.