Game Theory … Contd.

Nicholson and Snyder Chapter 8

 Sequential Games
• In some games the order of moves matters.
• In sequential games, a player who moves later
in the game can observe players who have
played up to that moment.
• Information from observations can influence
strategy.
• A player’s strategy will then be a contingent
plan dependent on the actions taken by other
players.
 Sequential Battle of the Sexes
• Husband and Wife do not make simultaneous
moves.
• Wife moves first, choosing either ballet or
boxing.
• Husband observes and then decides.
• Wife has two pure strategies: Boxing, Ballet
• However, Husband’s strategy set has
expanded.
• Husband’s contingent strategies:
Husband’s Conditional Notation (Husband
Strategy first)
Always go to (Ballet | Ballet ; Ballet| Boxing)
Ballet (Ballet | Ballet ; Boxing| Boxing)
Follow Wife (Boxing | Ballet ; Ballet | Boxing)
Do the opposite (Boxing | Ballet ; Boxing | Boxing)
Always go to
• Corresponding
Boxing Normal Form:
Husband
Always to Follow Do Always to
Ballet Wife Opposite Boxing
Wife Ballet 2, 1 2, 1 0, 0 0, 0
Boxin 0, 0 1, 2 0, 0 1, 2
Whengwe solve for NE by underlining BR’s we find 3 equilibria in pure strategies.
Game theory allows us to choose among the equilibria.
• When we draw the game in extensive form we
remove the fence from the husband’s decision
nodes as they are not in the same information
set. The Husband is
Ballet (2 , 1)
now able to
H
observe the Wife’s
Ballet (0 , 0) actions first, before
Boxing
deciding upon his
W Ballet (0 , 0) own actions. We
no longer have a
Boxing H simultaneous move
Boxing (1 , 2) game.
• Let us think about the game a little more.
• Suppose the Husband wishes to go to boxing. So he
“threatens” his Wife by saying that he will always go to
boxing.
• If the Wife ignores the threat and insists on going to
ballet, what will the Husband do? Will he still go to
boxing as he had threatened to do?
• The answer is no. Why? Because if the Wife goes to
ballet and the Husband carries out his threat by going
to boxing, he will end up with a payoff of zero rather
than a payoff of one if he had accompanied his wife to
the ballet (remember, in game theory the players
always prefer higher payoffs).
• The “threat” by the Husband is therefore a
“non-credible” or “empty” threat.
• By a similar logic, always to ballet is also an
empty threat.
• Empty vs. Credible threats can be understood
using the concept of “equilibrium path”: the
connected path through the game tree
implied by the equilibrium strategies.
• Recall the third NE (boxing, always to boxing). In it the husband always
goes to boxing. Along the dashed line, we have a rational outcome if the
wife goes to boxing. If the wife goes to ballet and the husband still goes to
boxing, represented by the bold black line, there will be an irrational
outcome.

Ballet (2 , 1) The dashed line is

the “equilibrium
H path”, the rest of
Ballet (0 , 0)
Boxing the game tree is
W (0 , 0)
“off the equilibrium
Ballet path.”
Boxing H
Boxing (1 , 2)
• The concept of subgame-perfect-equilibrium (SPE)
rules out irrational play. It is only useful for sequential
games.
• SPE is a refinement which rules out empty threats by
requiring strategies to be rational even for
contingencies which do not arise in equilibrium.
• Definitions:
1. Subgame: Part of the extensive form beginning with a
decision node and including everything to the right of
it.
2. Proper subgame: A subgame that starts at a decision
node not connected to another in an information set.
The simultaneous move game has only one proper
subgame: the whole game itself.

Ballet (2 , 1)

H
Ballet (0 , 0)
Boxing

W Ballet (0 , 0)

Boxing H
Boxing (1 , 2)
In the sequential game there are three proper subgames.
(i) The whole game itself and (ii) the two subgames
starting
at node 2 (the Husband’s node).

Ballet (2 , 1)

H
Ballet (0 , 0)
Boxing

W Ballet (0 , 0)

Boxing H
Boxing (1 , 2)
• Definition of SPE: it is a strategy profile
(s1*, s2*, … , sn*) that constitutes a NE for every
proper subgame. (An SPE is always a NE)
• In a game-tree, SPE can be found by means of
backward induction. In it, we work backwards
from the end of the game:
i. Identify all of the subgames at the end of the
extensive form. Find all the NE of the subgames.
ii. Replace subgames with the actions and payoffs
resulting from the NE.
iii. Move up the game and repeat.
 1. Here node 1 is the
wife and node 2 the
husband.

2. Start at the end of

the game. When wife
chose Ballet, the
husband should choose
ballet in equilibrium,
Boxing is ruled out.

3. When wife chose

Boxing, husband should
4. After we have got rid of irrational strategies at the choose Boxing in
end of the game, we put the payoffs of the rational equilibrium and Ballet is
strategies at the husband’s nodes and then see what ruled out.
strategy the wife would choose in equilibrium. We get a
reduced form game-tree (as on the right, above)

5. The wife would choose Ballet to maximise her payoff.

So the SPE is (Ballet, Ballet) for a payoff of (2, 1)
• Redraw the game-tree with the husband at
node 1 and the wife at node 2. Remember to
adjust the payoffs at the end of the game (this
time, the husband’s payoff would come first).
• Repeat the backwards induction process. You
should come up with a SPE of (Boxing, Boxing)
with a payoff of (2, 1).
• Backwards induction allows us to jump
straight to SPE bypassing other NE.