Chapter 4 Mixed Strategy

aTwo kind of strategies:

Mixed Strategies
`pure
`mixed

and aTwo kinds of equilibrium

`pure strategy
Mixed Strategy `mixed strategy
aTwo games with mixed strategy equilibria:
Equilibrium `Matching Pennies
`Market Niche
1 2

Matching Pennies: The payoff matrix Matching Pennies: No equilibrium in

(All payoffs in cents) pure strategies
All Best Responses are underlined.
Player 2 Player 2
Player 1 Heads Tails Player 1 Heads Tails

Heads Heads
+1, -1 -1, +1 +1, -1 -1, +1

Tails -1, +1 +1, -1 Tails -1, +1 +1, -1

3 4

Computing Mixed Strategy Matching Pennies:

Equilibria in 2×2 Games What about mixed strategies?
aSolution criterion: each pure strategy in a probability y 1- y
mixed strategy equilibrium pays the same 1 2
at equilibrium probability
h t

aEach pure strategy not in a mixed strategy x H +1, -1 -1, +1

equilibrium pays less
aDetailed calculations for Matching Pennies
1- x T -1, +1 +1, -1
and Market Niche
aAn appealing condition on equilibria: x, y between 0 and 1
payoff dominance
5 That is, 0 ≤ x ≤ 1 and 0 ≤ y ≤ 1 6
 Need to calculate player 1’s expected Need to calculate player 2’s expected
utility from player 2’s mixed strategy utility from player 1’s mixed strategy
probability y 1- y 2
1
1 2 h t
h t EU1: probability
x H +1, -1 -1, +1
H +1, -1 -1, +1 2y - 1

1- x T -1, +1 +1, -1
T -1, +1 +1, -1 1 - 2y

EU2: 1 - 2x 2x - 1
EU1(H) = y × 1 + (1- y) × -1 = 2y - 1 EU2(h) = x × -1 + (1- x) × 1 = 1 - 2x
EU1(T) = y × -1 + (1- y) × 1 = 1 - 2y 7 EU2(t) = x × 1 + (1- x) × -1 = 2x - 1 8

In equilibrium, Player 1 is willing to randomize Similarly, Player 2 is willing to randomize

only when he is indifferent between H and T only when she is indifferent between h and t

Player 1’s Conditions:

EU1(H) = y × 1 + (1- y) × -1 = 2y - 1
EU1(H) = EU1(T)
EU1(T) = y × -1 + (1- y) × 1 = 1 - 2y

In equilibrium: EU1(H) = EU1(T) Player 2’s Conditions:

EU2(h) = x × -1 + (1- x) × 1 = 1 - 2x
∴ 2y - 1 = 1 - 2y EU2(t) = x × 1 + (1- x) × -1 = 2x - 1
⇒ 4y = 2
In equilibrium: EU2(h) = EU2(t)
⇒ y=½
∴ 1 - 2x = 2x - 1
⇒ 1-y=1-½=½
⇒ x=½ and 1 - x = 1 - ½ = ½
∴ y=1-y=½
9
∴ x=1-x=½ 10

Matching Pennies: Mixed strategies are not intuitive:

Equilibrium in mixed strategies You randomize to make me indifferent.
probability ½ ½
Row randomizes to make Column
1 2
probability
h t EU1: indifferent.
½ H +1, -1 -1, +1 0 Column randomizes to make Row
|| indifferent.
½ T -1, +1 +1, -1 0
Then each is playing a best
response to the other.
EU2: 0 = 0
Each is playing a best response to the other!
11 12
 Market Niche: Two pure strategy
Market Niche: The payoff matrix equilibria
Mutual best responses form an equilibrium.
Firm 2 Firm 2
Firm 1 Enter Stay Out Firm 1 Enter Stay Out

Enter Enter
-50, -50 100, 0 -50, -50 100, 0

Stay Out 0, 100 0, 0 Stay Out 0, 100 0, 0

13 14

Market Niche: Need to calculate firm 1’s expected

What about mixed strategies? utility from firm 2’s mixed strategy
probability y 1- y probability y 1- y

1 2 1 2
e s e s EU1:
probability

x E -50, -50 100, 0 E -50, -50 100, 0 100 - 150y

1- x S S 0, 100 0, 0 0
0, 100 0, 0

x, y between 0 and 1 EU1(E) = y × -50 + (1- y) × 100 = 100 - 150y

That is, 0 ≤ x ≤ 1 and 0 ≤ y ≤ 1 15

EU1(S) = y × 0 + (1- y) × 0 = 0 16

Need to calculate firm 2’s expected In equilibrium, Firm 1 is willing to randomize

utility from firm 1’s mixed strategy only when it is indifferent between E and S

1 2 EU1(E) = y × -50 + (1- y) × 100 = 100 - 150y

e s EU1(S) = y × 0 + (1- y) × 0 = 0
probability

x E -50, -50 100, 0 In equilibrium: EU1(E) = EU1(S)

∴ 100 - 150y = 0
1- x S ⇒ 150y = 100
0, 100 0, 0
⇒ y = 2/3
EU2: 100-150x 0 ⇒ 1 - y = 1 - 2/3 = 1/3
EU2(e) = x × -50 + (1- x) × 100 = 100 - 150x
∴ y = 2/3 and 1 - y = 1/3
EU2(s) = x × 0 + (1- x) × 0 = 0 17 18
 Similarly, Firm 2 is willing to randomize only Market Niche:
when it is indifferent between h and t Equilibrium in mixed strategies
Firm 1’s Conditions: probability 2/3 1/3
EU1(E) = EU1(S)
1 2
e s EU1:
Firm 2’s Conditions: probability
EU2(e) = x × -50 + (1- x) × 100 = 100 - 150x
EU2(s) = x × 0 + (1- x) × 0 = 0 2/3 E -50, -50 100, 0 0
||
In equilibrium: EU2(e) = EU2(s)
1/3 S 0, 100 0, 0 0
∴ 100 - 150x = 0
⇒ 150x = 100
EU2: 0 = 0
∴ x = 2/3 and 1 - x = 1/3 19
Each firm is playing a best response to the other!
20

Mixed Strategies and

bluffing: Liar’s Poker Liar’s Poker: extensive form
aMixed strategies as a way to be Call 1, -1
unpredictable Says
ace 0.5, -0.5
aBluffing and mixed strategies Ace 2
Fold
-1, 1
Call
aLiar’s poker, a game where bluffing pays 1/2
1 Says
ace Fold 0.5, -0.5
0
1/2
King 1
Says
king 0, 0
21 22

Liar’s Poker: No pure strategy

Liar’s Poker: normal form equilibrium

1 2 1 2
Call Fold Call Fold

Say A when K Say A when K

0, 0 0.5, -0.5 0, 0 0.5, -0.5

Say K when K 0.5, -0.5 0.25, -0.25 Say K when K 0.5, -0.5 0.25, -0.25

23 24
 Liar’s Poker: Each player calculates his expected
What about mixed strategies? utility from other’s mixed strategy
probability y 1- y probability y 1- y

1 2 1 2
c f c f EU1:
probability probability

x A when K 0, 0 0.5, -0.5 x A when K 0, 0 0.5, -0.5 0.5 - 0.5y

1- x K when K 0.5, -0.5 0.25, -0.25 1- x K when K 0.5, -0.5 0.25, -0.25 0.25 + 0.25y

x, y between 0 and 1 EU2: 0.5x - 0.5 -0.25x - 0.25

That is, 0 ≤ x ≤ 1 and 0 ≤ y ≤ 1 25 26

In equilibrium, player 1 is willing to randomize Similarly, Player 2 is willing to randomize

only when he is indifferent between A and K only when she is indifferent between c and f

Player 1’s Conditions:

EU1(A) = y × 0 + (1- y) × 0.5 = 0.5 - 0.5y
EU1(A) = EU1(K)
EU1(K) = y × 0.5 + (1- y) × 0.25 = 0.25 + 0.25y

In equilibrium: EU1(A) = EU1(K) Player 2’s Conditions:

EU2(c) = x × 0 + (1- x) × -0.5 = 0.5x - 0.5
∴ 0.5 - 0.5y = 0.25 + 0.25y EU2(f) = x × -0.5 + (1- x) × -0.25 = -0.25x - 0.25
⇒ 0.75y = 0.25
In equilibrium: EU2(c) = EU2(f)
⇒ y = 1/3
∴ 0.5x - 0.5 = -0.25x - 0.25
⇒ 1 - y = 1 - 1/3 = 2/3
⇒ 0.75x = 0.25
∴ y = 1/3 and 1 - y = 2/3
27
∴ x = 1/3 and 1 - x = 2/3 28

Mixed Strategy Equilibria of

Liar’s Poker:
Coordination Games and Coordination
Equilibrium in mixed strategies Problems
probability 1/3 2/3 aGames with mixed strategy equilibria
1 2
c f EU1:
which cannot be detected by the arrow
probability diagram
1/3 A 0, 0 0.5, -0.5 1/3 aThe mixed strategy equilibrium of Video
|| System Coordination is not efficient
2/3 K 0.5, -0.5 0.25, -0.25 1/3

EU2: -1/3 = -1/3

Each player is playing a best response to the other!
29 30
 Asymmetric Mixed Strategy
Correlated Equilibrium Equilibria

aMixed strategy Nash equilibria tend to aMaking a game asymmetric often makes
have low efficiency its mixed strategy equilibrium asymmetric
aCorrelated equilibria aAsymmetric Market Niche is an example
`public signal
`Nash equilibrium in game that follows

31 32

Asymmetrical Market Niche: Asymmetrical Market Niche:

The payoff matrix Two pure strategy equilibria
Firm 2 Firm 2
Firm 1 Enter Stay Out Firm 1 Enter Stay Out

Enter Enter
-50, -50 150, 0 -50, -50 150, 0

Stay Out 0, 100 0, 0 Stay Out 0, 100 0, 0

33 34

Asymmetrical Market Niche: Need to calculate each firm’s expected

What about mixed strategies? utility from the firm’s mixed strategy
probability y 1- y probability y 1- y

1 2 1 2
e s probability e s EU1:
probability
x E -50, -50 150, 0
x E -50, -50 150, 0 150 - 200y

1- x S
1- x S 0, 100 0, 0 0, 100 0, 0 0

x, y between 0 and 1 EU2: 100 - 150x 0

That is, 0 ≤ x ≤ 1 and 0 ≤ y ≤ 1 35 36

In equilibrium, Firm 1 is willing to randomize Similarly, Firm 2 is willing to randomize only
only when it is indifferent between E and S when it is indifferent between h and t

EU1(E) = y × -50 + (1- y) × 150 = 150 - 200y Firm 1’s Conditions:

EU1(S) = y × 0 + (1- y) × 0 = 0 EU1(E) = EU1(S)

In equilibrium: EU1(E) = EU1(S) Firm 2’s Conditions:

EU2(e) = x × -50 + (1- x) × 100 = 100 - 150x
∴ 150 - 200y = 0
EU2(s) = x × 0 + (1- x) × 0 = 0
⇒ 200y = 150
⇒ y = 3/4
In equilibrium: EU2(e) = EU2(s)
⇒ 1 - y = 1- 3/4 = 1/4 ∴ 100 - 150x = 0
⇒ 150x = 100
∴ y = 3/4 and 1 - y = 1/4
37
∴ x = 2/3 and 1 - x = 1/3 38

Asymmetrical Market Niche: Asymmetrical Market Niche:

Equilibrium in mixed strategies Equilibrium in mixed strategies
probability
3/4 1/4
Although the two pure strategy
1 2
probability
e s EU1: equilibria (E,s) and (S,e) did not
change in Asymmetrical Market
2/3 E -50, -50 150, 0 0
Niche, the mixed strategies
|| equilibrium did change.
1/3 S 0, 100 0, 0 0

EU2: 0 = 0
Each firm is playing a best response to the other!
39 40

Chicken:
Chicken The payoff matrix
aTwo drivers race toward a cliff player 2 drive straight
player 1
aStrategy choice: ahead swerve
`swerve
drive straight
`straight ahead -10, -10 1, -1
ahead
aMore general version of the game:
`back down
`do not back down
swerve -1, 1 0, 0
aSolution as in Market Niche Game

41 42
 Chicken: Chicken:
strategy for player 1 strategy for player 2
player 2 drive straight player 2 drive straight
player 1 ahead swerve player 1 ahead swerve

drive straight drive straight

-10, -10 1, -1 -10, -10 1, -1
ahead ahead

swerve -1, 1 0, 0 swerve -1, 1 0, 0

43 44

Chicken: Chicken:
two pure strategy Nash equilibria The payoff matrix
player 2 probability
player 2
drive straight y 1- y
player 1 ahead swerve player 1 straight swerve
probability
drive straight x straight -10, -10 1, -1
-10, -10 1, -1
ahead

1- x swerve -1, 1 0, 0
swerve -1, 1 0, 0
x, y between 0 and 1

45
That is, 0 ≤ x ≤ 1 and 0 ≤ y ≤ 1 46

Chicken: In equilibrium, player 1 is willing to randomize only

when she is indifferent between “swerve” and “straight”
The payoff matrix
player 2 probability
y 1- y EU1(straight) = y × (-10) + (1-y) × 1 = 1 – 11y
player 1 straight swerve EU1 EU1(swerve) = y × (-1) + (1- y) × 0 = -y
probability In equilibrium: EU1(swerve) = EU1(straight)
x straight -10, -10 1, -1 1 – 11y
∴ 1 – 11y = - y
⇒ 1 = 10y
1- x
swerve -1, 1 0, 0 -y ⇒ y = 1/10
⇒ 1 - y = 1 - 1/10 = 9/3

EU2 1 – 11x -x ∴ y = 1/10 and 1 - y = 9/10

47 48
 Similarly, player 2 is willing to randomize only when Chicken:
he is indifferent between “swerve” and “straight”
The payoff matrix
Player 1’s Conditions: player 2 probability
EU1(swerve) = EU1(straight) 1/10 9/10
player 1 straight swerve EU1

Player 2’s Conditions: probability

EU2(straight) = x × (-10) + (1-x) × 1 = 1 – 11x 1/10 straight -10, -10 1, -1 -0.1
EU2(swerve) = x × (-1) + (1- x) × 0 = -x

In equilibrium: EU2(swerve) = EU2(straight)

9/10 swerve -1, 1 0, 0 -0.1
∴ 1 – 11x = - x
⇒ x = 1/10

∴ x = 1/10 and 1 - x = 9/10 49

EU2 -0.1 -0.1
50

Everyday Low Pricing:

Everyday Low Prices The payoff matrix
Normal Sale
aSales are mixed strategies Retailer 2
price price
Retailer 1
aSears’ marketing campaign to do away np sp

with sales, called Everyday Low Prices

NP 7500, 7500 7500, 8500
aTwo types of buyers:
`informed
`uninformed
aA mixed strategy equilibrium tells how SP 8500, 7500 5500, 5500

often to run sales

51 52

Everyday Low Pricing: Everyday Low pricing:

Two pure strategy equilibria What about mixed strategies?
Retailer 2 probability y 1- y
Retailer 1
np sp 1 2
np sp
probability
NP 7500, 7500 7500, 8500 x NP 7500, 7500 7500, 8500

1- x SP 8500, 7500 5500, 5500

SP 8500, 7500 5500, 5500
x, y between 0 and 1

53 That is, 0 ≤ x ≤ 1 and 0 ≤ y ≤ 1 54

 Each retailer calculates its expected In equilibrium, Retailer 1 is willing to randomize
utility from other’s mixed strategy only when it is indifferent between NP and SP

probability y 1- y
EU1(NP) = y × 7500 + (1- y) × 7500 = 7500
1 2 EU1(SP) = y × 8500 + (1- y) × 5500 = 3000y + 5500
np sp EU1
probability
In equilibrium: EU1(NP) = EU1(SP)
x NP 7500, 7500 7500, 8500 7500 ∴ 7500 = 3000y + 5500
⇒ 3000y = 2000
1- x SP 8500, 7500 5500, 5500 3000y + 5500 ⇒ y = 2/3
⇒ 1 - y = 1 - 2/3 = 1/3
EU2: 7500 3000x + 5500
∴ y = 2/3 and 1 - y = 1/3
55 56

Similarly, Retailer 2 is willing to randomize Everyday Low Pricing:

only when it is indifferent between c and f Equilibrium in mixed strategies
Retailer 1’s Conditions: probability
EU1(SP) = EU1(NP) 2/3 1/3
1 2
np sp EU1:
Retailer 2’s Conditions: probability
EU2(np) = x × 7500 + (1- x) × 7500 = 7500
EU2(sp) = x × 8500 + (1- x) × 5500 = 3000x + 5500 2/3 NP 7500, 7500 7500, 8500 7500
||
In equilibrium: EU2(np) = EU2(sp)
1/3 SP 8500, 7500 5500, 5500 7500
∴ 7500 = 3000x + 5500
⇒ 3000x = 200
EU2: 7500 = 7500
∴ x = 2/3 and 1 - x = 1/3 57
Each player is playing a best response to the other!
58

Mixed strategies are not intuitive: Appendix: Bluffing in 1-card

You randomize to make me indifferent. Stud Poker
aA version of poker with 3 kinds of cards
R Row randomizes to make Column (ace, king, and queen), 1-card hands, and
E indifferent. players who see their cards
M aFor some ratios of the ante to the bet, 1-
Column randomizes to make Row
I card stud poker has a unique equilibrium
N indifferent. which is in mixed strategies
D Then each is playing a best aEquilibrium play in poker usually calls for
E
response to the other. some bluffing
R aThe solution of poker has all players
59 breaking even 60
 One-card Stud Poker One-card Stud Poker.
Payoff matrix, player 1 Payoff matrix, player 1, a=$1, b=$1
Player 2 Player 2
Player 1 I: Bet AKQ II: Bet AK III: Bet AQ IV: Bet A Player 1 I: Bet AKQ II: Bet AK III: Bet AQ IV: Bet A

I: Bet AKQ (a-2b)/9, (4a-2b)/9, I: Bet AKQ

0, 0 3a/9, -3a/9 (2b-4a)/9 0, 0 -1/9, 1/9 3/9, -3/9 2/9, -2/9
(2b-a)/9

(2b-a)/9, (a+b)/9, (2a-b)/9,

II: Bet AK 0, 0 II: Bet AK 1/9, -1/9 0, 0 2/9, -2/9 1/9, -1/9
(a-2b)/9 -(a+b)/9 (b-2a)/9

-(a+b)/9, (2a-b)/9, 1/9, -1/9

III: Bet AQ -3a/9, 3a/9 0, 0 III: Bet AQ -3/9, 3/9 -2/9, 2/9 0, 0
(a+b)/9 (b-2a)/9

(2b-4a)/9, (b-2a)/9, (b-2a)/9,

IV: Bet A (2a-b)/9 (2a-b)/9 0, 0 IV: Bet A -2/9, 2/9 -1/9, 1/9 -1/9, 1/9 0, 0
(4a-2b)/9
61 62

One-card Stud Poker.

Payoff matrix, player 1, a=$1 b=$2
Player 2
Player 1 I: Bet AKQ II: Bet AK III: Bet AQ IV: Bet A

I: Bet AKQ 0, 0 -3/9, 3/9 3/9, -3/9 0, 0

II: Bet AK 3/9, -3/9 0, 0 3/9, -3/9 0, 0

III: Bet AQ -3/9, 3/9 -3/9, 3/9 0, 0 0, 0

IV: Bet A 0, 0 0, 0 0, 0 0, 0
63