Professional Documents
Culture Documents
Behavior
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Dominant Strategy
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Dominated Strategy
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Dominated Strategy
Toyota
Build Large Build Small Do not build
Build Large 0, 0 12, 8 18, 9
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Dominated Strategy
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Finding a NE by Identifying DS and Eliminating Dominated Strategies
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ACTIVE LEARNING 1
Finding the NE: Coke versus Pepsi
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ACTIVE LEARNING 1
Answers
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ACTIVE LEARNING 1
Answers
Coke
$10.50 $11.50 $12.50 $13.50
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Games with More Than One NE
- So far, we only studied games that have a unique NE, but
some games have more than one NE.
- 2 famous examples:
Battle of the sexes.
Game of Chicken.
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Games with more than one NE
1. Battle of the sexes
- Two players: husband and wife.
- Strategies: go to a football game / go to the theater.
- Each player prefers to be with the other.
- What are the NE in this game?
Wife
Football Theater
Husband Football 3, 1 0, 0
Theater 0, 0 1, 3
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Games with More Than One NE
2. The game of Chicken
- Two players: 2 teenagers. They want to prove their manhood
to their friends. They drive toward each other at vertiginous
speed. The one that didn’t swerve becomes a hero, while the
other loses face (he is a ‘Chicken’). If both swerve, nothing
gets proven: no gain. If neither swerves, they crach into each
other.
- Strategies: go straight / swerve.
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Games with More Than One NE
What are the NE in the game of Chicken?
Teenager 2
Go straight Swerve
Go straight - ∞, - ∞ 10, -10
Teenager 1
Swerve -10, 10 0, 0
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Games with More Than One NE
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Finding All of the Nash Equilibria in a Game
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Finding All of the Nash Equilibria in a Game
Strategy B 3, 10 0, 0 15, 2
Player 1
Strategy C 12, 14 4, 11 5, 4
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Finding all of the Nash Equilibria in a game
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Mixed Strategies
1. Pure strategy: A specific choice of strategy from the player’s
possible strategies in a game.
2. Mixed strategy: A choice among 2 or more pure strategies
according to pre-specified probabilities.
Example
In the game of ‘battle of the sexes’,
- Go to a football game and go to the theater are pure strategies.
- Go to a football game with probability ½ and go to the theater with
a probability ½ is an example of mixed strategies.
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Mixed Strategies
- Consider the following game: a tennis match between Roger Federer and Rafael
Nadal:
Nadal
q 1-q
l r
p L 50, 50 80, 20
Federer
1-p R 90, 10 20, 80
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Mixed Strategies
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ACTIVE LEARNING 2
Mixed Strategies
Suppose that instead of (50, 50), the payoffs are(30, 70). Find
the new NE in mixed strategies.
Nadal
q 1- q
l R
Federer
p L 30, 70 80, 20
1- p R 90, 10 20, 80
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ACTIVE LEARNING 2
Answers
- If Federer plays L, his payoff will be 30 q + 80 (1-q)
- If Federer plays R, his payoff will be 90 q + 20 (1-q)
- If Federer is mixing in NE, he must be indifferent between L and R (i.e. the
payoffs must be equal): 30 q + 80 (1-q) = 90 q + 20 (1-q), q = 0.5
- If Nadal plays l, his payoff will be 70 p + 10 (1-p)
- If Nadal plays r, his payoff will be 20 p + 80 (1-p)
- If Nadal is mixing in NE, he must be indifferent between l and r (i.e. the
payoffs must be equal): 70 p + 10 (1-p) = 20 p + 80 (1-p), p = 7/12
- Nash Equilibrium = [(7/12, 5/12); (0.5, 0.5)]
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Mixed Strategies
Consider the final match of the Women’s World Cup in 1999 between
the U.S. and China.
U.S. kicker
Aim Right Aim Left
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Mixed Strategies
- The U.S. kicker should ‘aim right’ with proba ½ and ‘aim left’
with probability ½.
- The Chinese goalie should ‘dive right’ with proba ½ and ‘dive
left’ with probability ½.
- If the U.S. kicker believes that the Chinese goalie will dive
right or left with probability ½, the U.S. kicker can do no better
than to choose to aim left or right with probability ½.
- The same thing for the Chinese goalie …
- Hence, when the players choose these mixed strategies, each is
doing the best it can given the actions of the other.
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ACTIVE LEARNING 3
Mixed Strategies
Consider the following mixed strategies in the World Cup
game:
- The U.S. kicker aims right with probability ¾ and left with
probability ¼.
- The Chinese goalie dives right with probability ¾ and left
with probability ¼.
Is this a NE in mixed strategies?
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ACTIVE LEARNING 3
Answers
- If the kicker aims right with probability ¾ and left with
probability ¼, the goalie’s best response is to dive to kicker’s
right with probability ¾ and to kicker’s left with probability ¼ .
- If the goalie dives to the kicker’s right with probability ¾ and
left with probability ¼, the kicker’s best response is to aim left
with probability ¾ (not ¼) and right with probability ¼ (not
¾).
- Thus, this is not a NE in mixed strategies.
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How to Find all the NE in a Simultaneous-Move Game with 2
Players
1. Look for DS. If both players have a dominant strategy, these constitute their NE
strategies.
2. If one player has a DS, this is the player’s NE strategy. To identify the other
player’s NE strategy, look for his best response.
3. If neither player has a DS, search for dominated strategies. Then, successively
eliminate each player’s dominated strategies to simplify the game and look for NE
strategies.
4. If neither player has dominated strategies, identify Player 1’s best response to
each of Player 2’s strategies and then identify Player 2’s best response to each of
Player 1’s strategies. NE occurs in cells with both players 1 and 2 best responses.
5. If the approach in the previous step does’nt bring out any pure strategy NE, i.e.
if the game doesn’t have a NE in pure strategies, look for an equilibrium in mixed
strategies.
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The Repeated Prisoner’s Dilemma
Cheat Cooperate
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The Repeated Prisoner’s Dilemma
- Suppose that the 2 players will be playing the game again and again. In
this case, it is possible that they might achieve an equilibrium in which
they cooperate.
- Suppose that Player 1 believes that Player 2 will apply the following
strategy: Start off choosing cooperate and continue to do so as long as
Player 1 cooperates. If Player 1 cheats, Player 2 will cheat forever after
(Grim trigger strategy).
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The Repeated Prisoner’s Dilemma
- If Player 1 cooperates today and in all subsequent periods, he will receive a stream of
payoffs equal to 10 per period.
- If Player 1 cheats today, he has a payoff of 14 now but a payoff of 5 in all subsequent
periods.
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The Repeated Prisoner’s Dilemma
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The Repeated Prisoner’s Dilemma
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The Repeated Prisoner’s Dilemma
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Sequential-Move Games and Strategic Moves
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Analyzing Sequential-Move Games
- Recall the simultaneous-move capacity expansion game between Toyota and
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Analyzing Sequential-Move Games
Game tree: a diagram that shows the different strategies that each player can follow
in a game and the order in which those strategies get chosen.
The game tree for the the sequential-move capacity expansion game between Toyota
and Honda is as follows:
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Analyzing Sequential-Move Games
To analyze the game tree, we will use the backward induction process.
Backward induction: a procedure for solving a sequential-move game by starting
at the end of the game tree and finding the optimal decision for the player at each
decision point.
In this example, we must find Toyota’s optimal decision for each of the 3 choices
Honda may make:
- If Honda chooses ‘build large’, Toyota’s best response is ‘do not build’.
- If Honda chooses ‘build small’, Toyota’s best response is ‘build small’.
- If Honda chooses ‘do not build’, Toyota’s optimal choice is ‘build small’.
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Analyzing Sequential-Move Games
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Analyzing Sequential-Move Games
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ACTIVE LEARNING 4
An entry game
- Suppose you own a firm that is considering entry into the digital camera business, where
you will compete head to head with Kodak which can react in one of two ways: it can start
a price war or it can be accommodating. You can enter this business on a large or a small
scale.
Small 4, 20 1, 16
Large 8, 10 2, 12
You
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ACTIVE LEARNING 4
Answers
1. ‘Large’ is a dominant strategy for you and the best response of Kodak will
be to start a ‘price war’. So the NE in the the simultaneous-move game is
(Large, Price war).
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ACTIVE LEARNING 4
Answers
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The Strategic Value of Limiting one’s Options
- In the sequential-move capacity expansion game, Honda committed in advance
to a particular course of actions whereas Toyota had the flexibility to respond to
Honda.
- Honda’s equilibrium profits were twice as large as Toyota’s. The firm that tied its
hand in advance fared better than the firm that maintained flexibility.
- Strategic moves that seemingly limit options can actually make a player better off
(Inflexibility can have a value).
- Strategic moves are actions that a player takes in a early stage of a game that
alter the player’s behavior and the other players’ behavior later in the game in a
way that is favorable to the first player.
- Example of strategic move: By committing in advance to the more aggressive
strategy of building a large plant, Honda makes it less attractive for Toyota to
expand its capacity.
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The Strategic Value of Limiting one’s Options
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The Strategic Value of Limiting one’s Options
The strategic move must be:
1. Visible
2. Understandable
3. Irreversible (to be credible)
For example, in the capacity expansion game,
- Toyota must observe and understand that Honda has made the commitment to
‘build large’. Otherwise, this move will not affect Toyota’s decision making.
- Toyota must believe that Honda will not back down from its commitment to
build a large plant. Honda’s ideal course of action is to bluff Toyota into
believing that it intends to choose ‘build large’, thereby causing Toyota to
choose ‘do not build’, but then to actually choose ‘build small’ (because it will
have a higher profit $20 million vs $18 million).
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The Strategic Value of Limiting one’s Options
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