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– Nash Equilibrium – Applications of Nash

– Examples of Nash Equilibrium Equilibrium
– Strict Vs Weak Nash
Equilibrium
– Best Response Function
– Finding NE using Best
responses
Tobacco Industry
■ Players: two companies A, B
■ Actions : invest OR do not invest in advertisement
■ Payoffs: given in the payoff matrix
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■ Why do competitors open their stores next to one another

■ https://www.youtube.com/watch?v=jILgxeNBK_8
OPEC Oil production
 Strict versus Weak Nash Equilibrium
› In a Nash equilibrium, each player’s equilibrium action has to be at
least as good as every other action, not necessarily better.
› Consider the following game:

L M R L M R
T 2, 2 1, 0 0, 1 T 1, 1 1, 0 0, 1 ui (a∗) ≥ ui (bi , a∗ )
B 1, 0 0, 1 1, 0 B 1, 0 0, 1 1, 0
› (T, L) is the unique Nash equilibrium.
ui (a∗) > ui (bi , a∗ ) › However, when Player 2 plays L, Player 1 is indifferent between T
and B.
› This is called a non-strict or weak Nash equilibrium.

› A weak Nash equilibrium is in some sense, less ”reasonable” than a

strict Nash equilibrium, since a tiny change in payoffs could cause it
Best Response Functions

■ Suppose that the players other than Player i play the action list a−i .
■ Let B i (a−i ) be the set of Player i ’s best (i.e. payoff - maximizing) actions, given
that the other players play a−i . (There may be more than one).
■B i is called the best response function of Player i .
■ B i is a set-valued function, that is, it may give a result with more than one element.
■Every member of B i (a−i ) is a best response of Player i to a−i .
Using Best Response Functions to find Nash Eq.
› Proposition: The action profile a∗ is a Nash equilibrium if
and only if every player’s action is a best response to the
other players’ actions:
∗
a i ∈ B i (a−i ) for every player i (1)
∗

› If the best-response function is single-valued and there are 2

players, condition 1 is equivalent to:
∗
a1 = b1(a2 )
∗
∗
a 2 = b2(a1 )
∗
 Prisoner’s Dilemma

■B i (Q) = {C } for i = 1, 2
■B i (C ) = {C } for i = 1, 2
■ At (C, C ), Player 1 is playing one of his best responses, C , to Player 2’s action, C .
■ At the same time, Player 2 is playing one of his best responses, C , to Player
1’s action, C .
Player 2

Player 1 best response B1(a2)

Nash Equilibrium Player 2 best response B2(a1)

C Q Player 1
 Battle of Sexes

wife
Football Shopping
Football 2, 1 0, 0
Husband
Shopping 0, 0 1, 2
 Battle of Sexes
Player 2
Player 1 and 2 best response

F
2 Nash Equilibrium

F S Player 1
wife
Football Shopping
Football 2, 1 0, 0
Husband
Shopping 0, 0 1, 2
Matching Pennies
Player 2
Head Tail
Head 1, -1 -1, 1
Player 1
Tail -1, 1 1, -1

Dr. Nisar ahmad

CUR 412: Game Theory and its Applications, Lecture 2
Player 2 Player 2 best response B2(a1)

Player 1 best response B1(a2)

T

H
No Nash Equilibrium

H T Player 1
Best Response function
 Player 1 best response B1(a2)
Player 2
Player 2 best response B2(a1)

Nash Equilibrium

Player 1
T B
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