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Game Theory
• Game theory models strategic behavior by agents
who understand that their actions affect the actions
of other agents.
• Been used to study
–
–
–
–
Market competition – Cournot Oligopoly.
Military strategies.
Bargaining/Negotiations
Biology
• A game consists of players, strategies, and
payoffs.
Battle of Bismarck Sea
Imamura
North
South
-2
-2
North
2
2
Kenny
-3
-1
South 1
3
• Imamura wants to transport troops.
• Kenny wants to bomb Japanese troops. .
• North route is two days, Southern route is three days.
• It takes one day for Kenny to switch routes.
Imamura wants to run convoy from Rabaul to Lae
A market analogue?
• Two companies, K and I, trying to maximise their
shares of a market of constant size by choosing
between two product designs N and S.
• N is similar to I’s old design and would keep some
of its customers even head-to-head with K.
• I is a much smaller company and can only make
one design.
• K is much larger company and can afford to start
with one design and switch.
• K has a marketing advantage, and would like to
compete head-to-head with I, while I would rather
carve out its own niche instead of head-to-head
competition.
Imamura Corp.
Time 1
Time 2
N
N
Kenny
S
S
30
70
60
70
40
N
30
30
70
20
80
S
70
80
30
Time 1+2
N
N
S
S
30
70
65
75
35
25
20
80
20
20
80
The Prisoners’ Dilemma
Clyde
S
S
Bonnie
C
C
-5
-5
-1
-15
-15
-1
-10
-10
Bonnie and Clyde are caught.
They can confess or be silent.
War
Mars
Not Shoot Shoot
-5
Not Shoot
-1
-5
-15
Venus
-10
-15
Shoot
-1
-10
Are we doomed to the bad outcome?
Not in trench warfare of WWI.
This happens since the game is repeated.
Tit-for-tat can work.
Not so easy if uncertainty of action.
The Capacity Game
GM
DNE
DNE
Ford
Expand
Expand
18
18
20
15
15
20
16
16
What is the equilibrium here?
Where would the companies like to be?
Information Technology Problem
• Phones, Faxes, e-mail, etc. all have the following
property:
– Network externalities: The more people using it the
more benefit it is to each user.
• Computers, VCRs, PS2s, also have this property
in that both software can be traded among users
and the larger the user market, the larger number
of software titles are made.
• How do markets operate with such externalities?
Discussion points
• Competitors: Sony vs. Beta, Qwerty vs. Dvorak,
Windows vs. Mac, Playstation vs. Xbox.
• Does the best always win?
• Standardization helps with network externalities.
– Drive on left side vs. right side. Out of 206 countries
144 (70%) are rhs.
– Left is more nature for an army: swords in right hand,
mounting horses. (Napolean liked the other way.)
– Sweden switched from left to right in 1967.
• Lots of networks: Religions and Languages.
Coordination Problem
Jim
VHS
VHS
Sean
Beta
Beta
1
1
0.5
0
0
0.5
2
2
• Jim and Sean want to have the same VCR.
• Beta is a better technology than VHS.
Nash equilibrium
• A Nash equilibrium is a set of strategies
– Where each player has no incentive to deviate.
– Given other equilibrium strategies a player
would choose his equilibrium strategy.
– A best response to a best response.
• A pure strategy equilibrium is where each player
only chooses a particular strategy with certainty.
• What are the pure-strategy equilibria in Prisoners’
dilemma and the coordination game.
• Is there always a pure strategy equilibrium?
Penalty Kick
Kick L
Kicker
Kick R
Goalie
Dive L
Dive R
1
-1
-1
1
1
-1
1
-1
• A Kicker can kick a ball left or right.
• A Goalie can dive left or right.
Mixed Strategy equilibrium
• Happens in the Penalty kick game.
• Notice that if the Kicker kicks 50-50 (.5L+.5R),
the Goalie is indifferent to diving left or right.
• If the Goalie dives 50-50 (.5L+.5R), the Kicker is
indifferent to kicking left or right.
• Thus, (.5L+.5R,.5L+.5R) is a mixed-strategy N.E.
• Nash showed that there always exists a Nash
equilibrium.
Do you believe it?
• Do they really choose only L or R? Yes. Kickers 93.8% and
Goalie 98.9%.
• Kickers are either left or right footed. Assume R means kick
in “easier” direction. Below is percentage of scoring.
Kick L
Kick R
Dive L
Dive R
58.3
94.97
92.91
69.92
• Nash prediction for
(Kicker, Goalie)=(41.99L+58.01R, 38.54L+61.46R)
• Actual Data
=(42.31L+57.69R, 39.98L+60.02R)
Parking Enforcement Game
Student Driver
Park OK Park in Staff
Check
University
Don’t
-5
-5
5
5
-5
-95
5
0
• Student can decide to park in staff parking.
• University can check cars in staff parking lot.
What happens?
•
•
•
•
If the University checks, what do the students do?
If the students park ok, what does the Uni do?
If the uni doesn’t check, what do the students do?
If the students park in the staff parking, what does
the uni do?
• What is the equilibrium of the game?
• What happens if the university makes it less harsh
a punishment to only –10. Who benefits from this?
Who is hurt by this?
Answer
• Student parks legally 1/3 of the time and the
uni checks 1/10 of the time.
• With lower penalty, student parks legally
1/3 of the time and the uni checks 2/3 of the
time.
• Who’s expected payoff changes? No one.