FEM11056 Game Theory and Applications: Tutorial

FEM11056
Game Theory and Applications
Tutorial
Week 3
13 Nov 2014
Tutorial (Week 3) FEM11056 13 Nov 2014 1 / 101

Contents
SPNE: NE is played in each subgame.

pure and mixed.
Multiple EQ SPNE
If a game has only 1 subgame, then all NE are also SPNE.
Finitely repeated games.
One deviation principle.
Joint trigger strategies: Nash Reversal =) next week.

What is a subgame?
A game obtained from the entire game.

Starts at an information set, and contains everything below it.
Starts at a singleton information set.
A subgame cannot cut any information set.

Exercise on Mixed NE
Question 4 from 2011 midterm exam.
Each year Q4 of the midterm is similar to this...
Here, there is only 1 subgame: I-set of P2 is not singleton.

Q1. Classify this game?
Dynamic game (P1 moves …rst, then P2).
Imperfect information game (P2 does not observe whether P1 played

L or M).

Q2 What is the most appropriate solution concept for this type of

games?
Dynamic game...thus, always SPNE.

Q3 Report all such EQ.
P2’s I-set is not singleton. Thus, there is only 1 subgame (the entire
game) =) SPNE = NE.
How to …nd NE? Always from the normal form.

Q4 Draw the Normal form.
First need to list out each player’s strategies:
P1 has 3 (L, M,R) and P2 has 2 (l, r ).

The Normal form is,
l r
L 4, 3 1, 1
=)
M 3, 2 1, 5
R 2, 0 2, 0

Q5 Compute all pure NE.
l r
L 4,3 1, 1
M 3, 2 1,5
R 2,0 2,0
To …nd pure NE, underline all BRs.
2 pure NE: (L, l ) =) (4, 3) and (R, r ) =) (2, 0)

Q6 Compute all mixed NE.
Always start by eliminating strictly dominated strategies...

that is, try to decrease the size of the matrix.
As mentioned last week, a strategy can be strictly dominated by a

mixed strategy.
You can eliminate both, NBR and weakly dominated .

Find mix to eliminate a pure strategy:
An appropriate mix of L and R might strictly dominate M. (note M

is also NBR)
...you need some guess work such that,
i) mix of 4 and 2 gives more than 3 (in green)
ii) mix of 1 and 2 gives more than 1 (in red)
...need a small weight on R.
eg. Mix strategy (0.8, 0, 0.2) strictly dominates M =) eliminate.
The reduced form matrix:
l r
L 4, 3 1, 1
R 2, 0 2, 0
Now we look for a mix NE...

Exercise on Mixed NE:
q 1 q
l r
L 4, 3 1, 1
R 2, 0 2, 0
Let P2 play a mix (q, 1 q ). Then,
P1s expected payo¤s are,
U1 ( L ) = 4q + (1 q ) = 3q + 1
U1 ( R ) = 2q + 2 (1 q) = 2

1
Intersection point is, 3q + 1 = 2 =) q = 3
Three regions, gives three cases:

1 q 2 ( 13 , 1]
2 q = 31
3 q 2 [0, 31 )

q 1 q
l r
L 4, 3 1, 1 U1 (L) = 3q + 1
R 2, 0 2, 0 U1 ( R ) = 2
Case 1: q 2 ( 31 , 1]
Then U1 (L) > U1 (R ) =) P1s BR is to play L
What is P2 best response to L =) to play l =) q = 1.
Mixed NE: ((1, 0, 0) , (1, 0)) = (L, l ) =) (4, 3).
Clearly, this is a pure NE as well...however, you must report it on your

exam as mixed NE in this manner.

q 1 q
l r
p L 4, 3 1, 1 U1 (L) = 3q + 1
1 p R 2, 0 2, 0 U1 ( R ) = 2
1
Case 2: q = 3
Then U1 (L) = U1 (R ) =) P1s BR is a mix (p, 0, 1 p) .
What is P2 best response to (p, 0, 1 p )?
P2s exp payo¤s: U2 (l ) = 3p and U2 (r ) = p
If p > 0, U2 (l ) > U2 (r ) =) P2s BR is l
Pure strategy l means q = 1.Contradiction with q = 13 ..no NE.
If p = 0, U2 (l ) = U2 (r ) =) P2s BR is any mix q 2 [0, 1].
But remember, P 1 will mix only for q = 31 ...
Mixed NE: ((0, 0, 1) , (q, 1 q )) =) (2, 0) where q = 13 .

q 1 q
l r
L 4, 3 1, 1 U1 (L) = 3q + 1
R 2, 0 2, 0 U1 ( R ) = 2
Case 3: q 2 [0, 13 )
Then U1 (L) < U1 (R ) =) P1s BR is to play R.
What is P2 best response to R? Any q 2 [0, 1]
But R is BR of P1 only if q 2 [0, 13 ).
Thus, mixed NE: ((0, 0, 1) , (q, 1 q )) =) (2, 0) where q 2 [0, 13 ).

The three mixed NE are:

1 ((1, 0, 0) , (1, 0)) = (L, l ) =) (4, 3)
1
2 ((0, 0, 1) , (q, 1 q )) =) (2, 0) where q = 3
3 ((0, 0, 1) , (q, 1 q )) =) (2, 0) where q 2 [0, 31 )
Note, mixed NE 2 and 3 can also be reported as,

((0, 0, 1) , (q, 1 q )) =) (2, 0) where q 2 0, 31

There is also another way to …nd mixed NE.

Draw the Best responses of each player...
Note that this will only work if you are considering only 2 strategies of
each player.

8 9
<p = 0 if q < 13 =
Best response of P1 to (q, 1 q ) is, BR1 (q ) = p 2 [0, 1] if q = 13
: ;
p=1 if q > 13
1.0
q
0.5
0.0
0.0 0.5 1.0
p

q 2 [0, 1] if p = 0
Best response of P2 to (p, 1 p ) is, BR2 (p ) =
q=1 if p > 0
1.0
q
0.5
0.0
0.0 0.5 1.0
p

Both players’best responses:
1.0
q
0.5
0.0
0.0 0.5 1.0
p
Intersections of BRs are NE (pure and mixed)...

A gives Mixed/Pure NE 1: ((1, 0, 0) , (1, 0)) = (L, l ) =) (4, 3).
B gives mixed NE 2 & 3:

((0, 0, 1) , (q, 1 q )) =) (2, 0) where q 2 0, 31 .

An important side note
Guess work to eliminate a pure strategy does not always work, and
isn’t always as clearly visible!
Also remember that it need not be that a weakly dominated strategy
or an NBR is eliminated by a mix.
For instance, if the payo¤s of P1 were like this...
l r
L 4, 3 1, 1
M 3, 2 2, 5
R 2, 0 2, 0
Now R is weakly dominated by M. But not strictly dominated by a

mix of L and M. There is no NBR.
...what to do? I suggest you plot expected payo¤s if you cannot
quickly determine how to reduce the size of a matrix.

Plot P1s exp. payo¤s...Let P2 mix (s, 1 s) :

U1 (L) = 3s + 1 (red) ; U1 (M ) = s + 2 (blue) ; U1 (R ) = 2 (green)
EU_1
4
0
0.0 0.2 0.4 0.6 0.8 1.0
s
Note we have 4 regions of s for which BR of P1 di¤ers.

U1 (L) = 3s + 1 (red) ; U1 (M ) = s + 2 (blue) ; U1 (R ) = 2 (green)
EU_1 4
0
0.0 0.5 1.0
s
Let P1 play8(L, M, R ) = (p, q, 1 q ): 9

>
> p = 0, q 2 [0, 1] if s = 0 >
>
< =
p = 0, q = 1 if s 2 (0, 21 )
BR1 (s ) =
>
> p+q = 1 if s = 12 >
>
: ;
p = 1, q = 0 if s > 21

4 regions of s =) thus 4 cases.
Consider each case separately to determine P2s best response to the

BRs of P1s listed above.
Expected payo¤s of P2 are: U2 (l ) = 3p + 2q, U2 (r ) = p + 5q
Your answer should be...

Case 1: s = 0 :
BR of P1 is mix M and R =) (0, q, 1 q ) (i.e. q 2 [0, 1] , p = 0)
BR P2? If p = 0, q 2 [0, 1], then U2 (l ) = 2q, U2 (r ) = 5q :
If q = 0, then U2 (l ) = U2 (r ) =) BR is any s 2 [0, 1] (only s = 0 is
within range).
NE1: ((0, 0, 1) , (0, 1)) = (R , r ) =) (2, 0)
If q > 1, then U2 (l ) < U2 (r ) =) BR is s = 0 (within range of our
case)
NE2: ((0, q, 1 q ) , (0, 1)) , q 2 (0, 1] =) (2, 5q )
Note you can also report these 2 NE as

((0, q, 1 q ) , (0, 1)) , q 2 [0, 1] =) (2, 5q ) (either way of reporting
is …ne.)

Case 2: s = 0, 12 :
BR of P1 is M =) (0, 1, 0) (i.e. p = 0, q = 1)
BR P2? If p = 0, q = 1, then U2 (l ) = 2, U2 (r ) = 5 :
U2 (l ) < U2 (r ) =) BR is r =) s = 0 =) contradiction (i.e not in
the range s 2 0, 21 )
no NE.

1
Case 3: s = 2 :
BR of P1 is mix L and M =) (i.e. p + q = 1)
BR P2? If p + q = 1 =) p = 1 q, then
U2 (l ) = 3p + 2 (1 p ) = p + 2,U2 (r ) = p + 5 (1 p) = 5 4p
3 regions: p 2 [0, 35 ), p = 53 , p 2 ( 35 , 1]
If p 2 [0, 53 ) or p 2 ( 35 , 1] =) P 2s BR is a pure
strategy =) contradicts s = 12 .
If p = 35 , then U2 (l ) = U2 (r ) =) BR is any s =2 [0, 1] (our case
s = 12 lies within this range)
3 2 1 1 5 13
NE3: 5, 5,0 , 2, 2 =) 2, 5

1
Case 4: s > 2 :
BR of P1 is L =) (i.e. p = 1, q = 0)
BR P2? If p = 1, q = 0, then U2 (l ) = 3, U2 (r ) = 1 =) plays
l =) s = 1...within range of s > 21
NE4: ((1, 0, 0) , (1, 0)) = (L, l ) =) (4, 3)

Exercise 1 - Centipede Game
Two players play the following game:
Find SPNE of the game. Use backward induction...

6 subgames: 1 at each I-set (since all are singletons).

Exercise 1
Last subgame
second to last subgame
...SPNE is (alwaysS, alwaysS ) =) (4, 1)

Exercise 1
Both can certainly do better than (4, 1).

How do we improve this =) next lecture...so look at the game once
before your class.

Exercise 2 - Three-in-one
Consider only pure NE and SPNE here:
1 Assume y 2 (0, 1). Find NE and SPNE for x 2 (0, 2).

2 Assume y 2 (0, 1). Find NE and SPNE for x > 2.
3 Assume y > 1. Find NE and SPNE for x > 0.

Exercise 2 - How many subgames? Three.

Exercise 2 - Strategies?
P2: has 1 I-set, 2 strategies =) o, i

P1: 2 I-sets, each with 2 actions, so 4 strategies =) OR, OL, IL, IR
Be consistent! The …rst alphabet for action at I-set1, the second
alphabet for action at I-set2.
OR : action O at I-set1, R at I-set2
OL : action O at I-set1, L at I-set2... and so on...
Exercise 2 -
Normal form:
o i
OR 1, 0 1 , 0
OL 1, 0 1 , 0
IL 0, x y , 0
IR 0, x 1 , 2
Note that OR and OL are equivalent strategies...

Exercise 2 -
Equivalent strategies: si , si0 2 Si are equivalent if

ui (si , s i ) = ui (si0 , s 1 ) for all s 1 2 S i .
So technically you can just call them O and reduce the matrix to,
o i
O 1, 0 1, 0
IL 0, x y , 0
IR 0, x 1, 2
BUT...this you can only do for the normal form, i.e. for NE, and not
for SPNE...since SPNE depends on what happens in subgames.

Exercise 2 - Q1
NE if y 2 (0, 1) and x 2 (0, 2) ?
o i
O 1, 0 1, 0
IL 0, x 2 (0, 2) y 2 (0, 1) , 0
IR 0, x 2 (0, 2) 1, 2
Pure NE: (IR, i ) =) (1, 2) and (O, o ) , (O, i ) , =) (1, 0).

[(OR, o ) , (OR, i ) , (OL, o ) , (OL, i ) =) (1, 0)]
None are strict. All are perfect besides (IR, i ): IR weakly dominated.
Also note that for P1, IL is strictly dominated by O.

Exercise 2 - Q1
SPNE if y 2 (0, 1) and x 2 (0, 2) ? Use backward induction.
2 SPNE: (OR, i ) =) (1, 0) and (IR, i ) =) (1, 2)

Exercise 2 - Q2
NE with y 2 (0, 1) and x > 2
o i
O 1, 0 1, 0
IL 0, x > 2 y 2 (0, 1) , 0
IR 0, x > 2 1, 2
Pure NE: (O, o ),(O, i ) =) (1, 0) .

[(OR, o ) , (OR, i ) , (OL, o ) , (OL, i )]
All are perfect, none are strict.

Exercise 2
SPNE y 2 (0, 1) and x > 2

P1’s moves in red, P2’s in blue
1 SPNE: (OR, o ) =) (1, 0).

Exercise 2 -
NE with y > 1 and x > 0?
o i
O 1, 0 1, 0
IL 0, x > 0 y > 1, 0
IR 0, x > 0 1, 2
2 Pure NE: (O, o ) =) (1, 0)

[(OR, o ) , (OL, o )]
None are strict.
None are perfect i¤ x 2 (0, 2) : o is then weakly dominated.

Exercise 2
SPNE y > 1 and x > 0

P1’s moves in red, P2’s in blue
1 SPNE: (OL, o ) =) (1, 0).

(Note: outcome is same, but this SPNE is di¤erent from the previous
SPNE (OR, o ) =) (1, 0)).

Exercise 3 - Seven Pirates
Seven pirates bring home a substantial bounty of 100 platinum bars.

They now have to decide how to split the treasure among themselves.
They decide to stick to the following rules:
1 Proposals are made in order of seniority (Oldest pirate makes the …rst
proposal, youngest will propose last)
2 If the proposal is approved, it is implemented and the game ends
3 If the proposal is rejected, the pirate that made the proposal is
excluded from the rest of the game.
4 A proposal is rejected if less than 50% of active pirates (i.e., not yet
excluded) accept the proposal.
5 A proposal is approved if 50% or more of active pirates accepts the
proposal.
6 If the last pirate rejects his own proposal, the treasure will become
sunk.

Exercise 3 -
Assume, for simplicity that:

The minimum unit of measure is one platinum bar, and
In case of indi¤erence between two successive proposals, a pirate
rejects the earlier proposal and accepts the later proposal.
Feel free to rank the pirates in decreasing order of age.
1 Characterize SPNE of the game, and its outcome.
Hint: You may want to specify which proposal is made in stage 7, 6,
etc., to each of the 7 pirates.
For SPNE start with the last subgame where pirate 7 (the youngest
pirate) makes the proposal.
P7 proposes in case all previous proposals were rejected.
Since P7 is the only one who can vote in this last stage, P7 is sure to
propose 100 to itself and 0 to all others.

Exercise 3 -
What about P6.

P6 knows what P7 will propose.
He only gets to propose in case all previous proposals are rejected.
P6 also knows that his own vote is su¢ cient to approve the proposal
(rule 5).
Thus, he proposes 100 to himself, and 0 to the rest.
And he accepts the proposal...it gets implemented.
Knowing all this, what does P5 propose?
P5 requires atleast 2 votes for approval (himself and another).
P5 also knows that P7 will not get anything in case P5’s proposal is
rejected. So P7 will accept anything higher than 0.
P5 will propose 99 to himself, 1 to P7 and 0 to all others.

Exercise 3 -
The analysis goes on...

P4 proposes 99 for himself, 1 for P6, 0 to all others.
P3 proposes 98 to himself, 1 each to P5 & P7, and 0 to others.
P2 proposes 98 to himself, 1 each to P4 and P6, and 0 to others.
P1 proposes 97 to himself, 1 each to P3, P5 & P7, and 0 to others.
SPNE is where P1 proposes and P3,P5,P7 accept the proposal, while
P2,P4,P6 reject it. Payo¤s are (97, 0, 1, 0, 1, 0, 1)

Exercise 3 - Forward Induction
Can we apply forward induction to this game?

The answer is no. It is not a relevant in this type of a game.
The reason is that forward induction only makes sense in games where a player
moves more than once. And the player who thinks forward (i.e. tries to infer why a
player has made a deviation from his BR) is doing so to infer the future move of
that player, (such as in the dynamic BoS game). In this game, each pirate makes
an o¤er only once. One player has nothing to infer about a future move a pirate
that has already made his proposal. One could argue that pirates could vote
strategically...say P5 could reject P3s o¤er of 1. What can P4 infer? He must be
doing so hoping to get more than 1 at a later stage. But P4 already has a strategy
to o¤et 99 to himself and 1 to P6, and 0 to others..this will be accepted. So P5
rejecting P3s o¤er does not change others behavior..they know they cannot do
better by changing their behavior.

Exercise 4 - Ocean’s Three
Three thieves: O, M, Y
have to decide how to split all the gold bars they stole from a bank.
The order in which each can make an o¤er to the other two is
seniority, starting from oldest.
After each thief has made an o¤er and each o¤er is rejected, the
default payo¤ is implemented:
half to Y , one-third to M, one-sixth to O : default payo¤
1 1 1
6, 3, 2 =) 16 , 26 , 63
To be accepted, an o¤er must receive approval from at least 2 thieves.
Find SPNE of the game.

Exercise 4
This is a dynamic game with multiple EQ. We will look at only one,
the most reasonable.
We assume in GT that whenever a player is indi¤erent between
accept and reject, he will accept the o¤er.
Start with the last subgame where Y makes an o¤er:
The outside option at this stage is the default payo¤: 1, 2, 3
6 6 6
Y can o¤er O his outside option of 16 , which will be accepted by O.
He needs only one other approval...his own!
So he can o¤er the rest, 56 , to himself and o¤er 0 to M.
The proposal is implemented with payo¤ 1 5
6 , 0, 6
(note: he can also o¤er M his outside option of 62 , but that leaves a
smaller amount for himself, thus not BR for Y )

Exercise 4
What happens in the previous stage, where M makes the o¤er:

In this stage, the outside option is the payo¤ from the last stage. i.e.
outside option becomes 16 , 0, 56 .
He can o¤er O the outside option, 61 , which will be accepted.
He keeps the rest for himself, and o¤ers 0 to Y .
Proposal is implemented, and payo¤s are 16 , 56 , 0
What happens in the …rst stage where O makes the o¤er:

Now the outside option is 16 , 56 , 0
He can o¤er Y his outside option of 0, and this will be accepted!
Why? If Y rejects, he gets 0 in the next stage anyway where the
proposal is implemented.
So he proposes (1, 0, 0) and this is implemented in the …rst stage.
This is our SPNE payo¤.
Not done yet...need to de…ne strategies for this SPNE!

Exercise 4
SPNE strategies
Payo¤ to
O M Y
default 16 2
6
3
6
1 5
Y 6 0 6
1 5
O¤ers by M 6 6 0
O 1 0 0
Notation: A=accept, R=reject. O¤ers to each denoted by o, m, y .
We will use behavioral strategies for each stage.
Strategy for Y :
Stage 1: A if y 0; R otherwise (o/w).
Stage 2: A if y 5
6 ; R o/w.
Stage 3: propose 1 , 0, 5 ; A if y 1; R o/w.
6 6 2
Note that the A/R decision in any stage is based on the outside
option in that stage.
Exercise 4
SPNE strategies
Strategy for M:
Stage 1: A if m 5 ; R otherwise (o/w).
6
Stage 2: propose 1 , 5 , 0 ; A if m 0; R o/w.
6 6
Stage 3: A if m 2 ; R o/w.
6
Strategy for O:
1;
Stage 1: propose (1, 0, 0) ; A if o 6 R o/w.
Stage 2: A if o 1
6 ; R o/w.
Stage 3: A if o 1
6 ; R o/w.
Use the one deviation principle here to check incentive to deviate.

Exercise 4 - uniqueness
This is not a unique SPNE. This game can have numerous EQ. We have only
solved for a most plausible one.
To reach this EQ we assume that players accept if they are indi¤erent between an
o¤er and their outside option. Another plauible EQ is that they will accept if the
o¤er is strictly larger than the outside option. Not much changes from the SPNE
we have found...a player needs to o¤er an epsilon greater than the outside option.
The outcome of the SPNE in this case will be where O o¤ers slightly more than 0
to Y (perhaps 1 bar of the total bars) in the …rst round and Y accepts.

Exercise 5
At time 0, an incumbent …rm, I , is already in the market. Firm E is a
potential entrant. To enter, E must incur a cost K > 0. Otherwise,
E gets 0. There are 3 production periods. In each period:
E moves …rst, with actions stay in (i ) , or go out (o ) .
If E stays in (i ), then I decides to …ght (f ), or accomodate (a).
Once E choose o, it stays out forever: E earns 0, I earns x.

The discount factor for both is δ. Assume that: (x > z > y ),
(y + δx > (1 + δ) z ) , & (1 + δ > K ) .
Find unique SPNE of the game
Exercise 5
Game Tree - payo¤s within each stage

Exercise 5
Game Tree - payo¤s overall all stages

Exercise 5
Calculating Payo¤s
discount rate strategy payo¤ E payo¤ I

t=0 i K 0
t=1 1 i, a 1 z
t=2 δ i, a 1 z
t=3 δ2 o 0 x
total K +1+δ z + zδ + x δ2
discount rate strategypayo¤ E payo¤ I
t=0 i K 0
t=1 1 i, a 1 z
t=2 δ i, a 1 z
t = 3 δ2 i, f 1 x
total K + 1 + δ δ2 z + zδ + y δ2
Payo¤ for all other strategies is calculated similarly.
But this is cumbersome and a waste of time!
Exercise 5
Make use of the one deviation principle:

In a …nite (repeated) game, in order to test for SPNE we only need to
consider single-stage deviations, i.e., deviations at only one I-set.
A deviation in one stage will apply to all stages.

Exercise 5
What happens if this game is played only once?
unique SPNE is (i, a) = (1, z ).
For Incumbent: a strictly dominates f in the subgame.
For Entrant: i strictly dominates o given that I plays a.

Exercise 5
This is true in any stage of the game.
Thus, unique SPNE for this repeated game is (always i, always a)
Payo¤s?
need to discount them by δt 1
1 + δ + δ2 K , z 1 + δ + δ2
Note: 1 + δ > K =) 1 + δ + δ2 K > 0 =) E ’s payo¤ is

strictly greater than outside option (out at t = 0 gives payo¤ 0) .
If this was not the case, then SPNE would be (oiiiii, always a) .

Exercise 6 - Stackleberg3
Solve the stackleberg model for 3 …rms with zero costs that move one
after the other in a market with inverse demand, p = 1 q.
In stackleberg, …rms choose quantities.
We will use backward induction.
Market demand can be expressed as: p = 1 ( q1 + q2 + q3 )
Start with the last mover (…rm3):
Find the BR: q3 (q1 , q2 ).
Pro…t: π 3 = p.q3 = (1 q1 q2 q3 ) .q3
FOC w.r.t q3 =) 1 q1 q2 2q3 = 0
1 q1 q2
q3 ( q 1 , q2 ) =
2

Exercise 6
Firm 2, will take q3 (q1 , q2 ) into account when maximizing its pro…t.
1 q1 q2 1 q1 q2
i.e. it takes demand to be: p = 1 q1 q2 2 = 2
1 q1 q2
π 2 = p.q2 = 2 .q2
FOC w.r.t q2 =) 1 2q1 q2 = 0
1 q1
q2 ( q1 ) =
2
Firm 1, will take q3 and q2 into account when maximizing its pro…t.
1 q1 1 q1 q2 1 q1
i.e. it takes demand to be: p = 1 q1 2 2 = 4
1 q1
π 1 = p.q1 = 4 .q1
1 q2
FOC w.r.t q1 =) 4 2 =0
1
q1 =
2
Using q1 we can …nd equilibrium q2 and q3 .
Exercise 6
SPNE quatities:
1 q1 1 q1 q2 1 1 1
q1 , , = , ,
2 2 2 4 8
Price in the market:

1 1 1 1
p=1 =
2 4 8 8
SPNE payo¤s:
1 1 1
(π 1 , π 2 , π 3 ) = , ,
16 32 64

Exercise T8.1 - Mixed Strategy SPNE
Find the mixed SPNE of the sequential Battle of the Sexes game:

Exercise T8.1 - I-sets and Strategies?

Exercise T8.1 - Subgames ?
Backward induction: start with subgame 1.

Exercise T8.1 -
Normal form of subgame 1:
q 1 q
o f
p O 2, 1 0, 0
1 p F 0, 0 1, 2
Let P2 play the mix (q, 1 q)

P1s exp. payo¤s: U1 (O ) = 2q, U1 (F ) = 1 q
8 9
< p=0 if q < 31 =
BR1 (q ) = p 2 [0, 1] if q = 13
: ;
p=1 if q > 13

Exercise T8.1 -
q 1 q
o f
p O 2, 1 0, 0
1 p F 0, 0 1, 2
Let P1 play the mix (p, 1 p)

P2s exp. payo¤s, U2 (o ) = p and U2 (f ) =2 2p :
8 9
< q=0 if p < 32 =
BR2 (p ) = q 2 [0, 1] if p = 23
: ;
q=1 if p > 23

Exercise T8.1 -
Best responses: P1 in red, P2 in blue.
1.0
q
0.5
0.0
0.0 0.5 1.0
p
3 intersection points...3 EQ.

Exercise T8.1 - Subgame 1 NE
2 Pure NE:
(O, o ) =) (2, 1) and (F , f ) =) (1, 2)
2 1 1 2 2 2
1 Mixed NE: 3, 3 , 3, 3 =) 3, 3
These are NE of subgame 1.

Exercise T8.1 -
Subgame 2:
Find NE given each NE of the subgame 1...
This will then be the SPNE of the entire game.
The question asked only for the mixed SPNE...I do it for all...

Subgame 1 pure NE: (O, o ) =) (2, 1)
SPNE1: (YO, o ) =) (2, 1) .

Subgame 1 pure NE: (F , f ) =) (1, 2)
SPNE2: (NF , f ) =) (1.5, 1.5) .

2 1 1 2 2 2
Subgame 1 Mixed NE: 3, 3 , 3, 3 =) 3, 3
SPNE3, Mixed strategy: 0, 0, 23 , 31 , 1 2

3, 3 =) (1.5, 1.5) .
where P1s strategies are (YO, YF , NO, NF )

Exercise T8.5 - Technology Adoption
During the adoption of a new technology a CEO (P1) can design a

new task for a division manager (P2).
The new task can be either high level (H) or low level (L).
P2 simultaneously chooses to invest in good training (T ) or bad
training (B ).
G B
H 5, 4 5, 2
L 2, 2 0, 0
Present the game in extensive form. Find all NE & SPNE.

Exercise T8.5 - Q1
G B
H 5,4 5, 2
L 2, 2 0,0
2 Pure NE: (H, G ) =) (5, 4) & (L, B ) =) (0, 0)
(DIY) 1 Mixed NE: 21 , 21 , 58 , 83 =) 54 , 1
SPNE?
All three. Because the game only has 1subgame and SPNE by
de…nition is NE.
Exercise T8.5 - Q2
Now assume that before the game is played the CEO (P1) can choose
not to adopt the new technology (N ), which gives payo¤s (1, 1), or
to adopt it (A), in which case the game is played.
Extensive form?
How many subgames? Two..

Exercise T8.5 - Subgames

Exercise T8.5 - NE?
NE? First make the normal form:

G B
AH 5,4 5, 2
AL 2, 2 0,0
NH 1,1 1,1
NL 1,1 1,1
3 PureNE: (AH, G ) =) (5, 4), (NH, B ) & (NL, B ) =) (1, 1)
Note: AL is NBR. Eliminate only if a mix strictly dominates it.
Mixed NE: Please DIY.

Exercise T8.5 - SPNE?
Use backward induction. Subgame1 has 3 NE (those from part (a)).

They were...
Pure NE: (H, G ) =) (5, 4)
Pure NE: (L, B ) =) (0, 0)
1 1 5 3
Mixed NE: 2, 2 =) 54 , 1
, 8, 8
Find the SPNE associated with each of these...

Exercise T8.5 - SPNE?
Subgame 1 NE (H, G ) =) (5, 4) :
First SPNE: (AH, G ) =) (5, 4)

Subgame 1 NE (L, B ) =) (0, 0) :
Second SPNE: (NL, B ) =) (1, 1)

1 1 5 3 5
Subgame 1 MixedNE: 2, 2 , 8, 8 =) 4,1 :
1 1 5 3
Third SPNE: 2 , 2 , 0, 0 , =) 54 , 1
8, 8
...don’t forget that P1s strategies are (AH, AL, NH, NL) .

Exercise T9.3 - Campaigning Revisited
Two political candidates are scheduled to campaign in two states, in
one at t = 1, and in the other at t = 2.
In each state each candidate can choose either:
a positive campaign that promotes his own agenda (P for P1 and p for
P2),
or a negative campaign that attacks his opponent (N for P1 and n for
P2).
State 1 residents do not mind negative campaigns. Payo¤s are,
p n
P 2, 2 0, 5
N 5, 0 3, 3
State 2 residents dislike negative campaigns. Payo¤s are,
p n
P 4, 4 1, 0
N 0, 1 2, 2
p n
Stage 1: P 2, 2 0, 5
N 5, 0 3, 3
Negative campaign strictly dominates positive for both players.
1 PureNE: (N, n ) =) (3, 3)
p n
Stage 2: P 4, 4 1, 0
N 0, 1 2, 2
2 PureNE: (P, p ) =) (4, 4) & (N, n ) =) (2, 2)
1 4 1 4 8 8
1 MixedNE: 5, 5 , 5, 5 =) 5, 5

Find pure SPNE with extreme discounting δ = 0.

If δ = 0, present value of payo¤ at t = 2 is 0 =)
vi = vit =1 + δvit =2 .= vit =1
Thus, at t = 1, both do negative campaigns (i.e. NE of the stage
game)
At t = 2, they play one of the 2 pureNE.
2 Pure SPNE if δ = 0: (NP, np ) =) (3, 3) & (NN, nn ) =) (3, 3)

Now let δ = 1. Find an SPNE where players choose (P, p ) at t = 1.

p n p n
Stage 1: P 2, 2 0, 5 and Stage 2: P 4, 4 1, 0
N 4, 0 3, 3 N 0, 1 2, 2
We have 3 NE at stage 2...

p n p n
Stage 1: P 2, 2 0, 5 and Stage 2: P 4, 4 1, 0
N 4, 0 3, 3 N 0, 1 2, 2
Find SPNE such that,
If (P, p ) is played in stage 1, then best NE is played in stage 2, ie.
(P, p ).
If a player deviates in stage 1, then worst NE is played in stage2, i.e.
mixedNE 15 , 45 , 15 , 45 =) 85 , 58
8
v1 (P ) = 2 + δ (4) = 6 and v1 (N ) = 4 + δ 5 = 5.6
Thus, P1 plays P. P2 has a symmetric case..plays p..
And we have an SPNE where (P, p ) is played in stage 1.

Lets try …nd a δ that supports (P, p ):

8
v1 (P ) = 2 + δ (4) & v1 (N ) = 4 + δ 5
2 + δ (4) > 4 + δ 85 =) δ > 10 12

Extra Exercise - Voting Game
3 legislators are voting sequentially on whether to give themselves a

pay raise.
The raise is worth b.
Each legislator who votes in favor of the raise entails a cost (in terms
of votes) of c, where c < b.
The outcome is decided by the majority rule.
Q1: Draw the extensive form.
For ease, lets de…ne the net bene…t if pay-raise implemented by,
d b c

Extensive form

Identify the strategies, and draw the normal form.

Players strategies:
L1 has 2 strategies: (N, Y )
L2 has 2 I -sets with 2 strategies at each, so 4 strategies:
(NN, NY , YN, YY ) . e.g. NN = play N if in I -set N, play N if in I -set
Y.
L3 has 4 I -sets, with 2 strategies at each, so 24 = 16 strategies:
YYYY , YYYN, YYNN, YNNN, NYYY , NNYY , NNNY , NNNN,
NYYN, NYNN, NNYN, NYNY , YNNY , YNYN, YNYY , YYNY
De…ne the net bene…t if pay-raise implemented by d = b c>0

Extra Exercise: Normal Form

Extra Exercise: Nash EQ

Extra Exercise: SPNE


SPNE is (N, NY , NYYN ) =) (b, d, d )

Is there a legislature who does not vote sincerely?
Yes. L1...and thus does not incur a cost c.

FEM11056 Game Theory and Applications: Tutorial

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FEM11056

Game Theory and Applications

Tutorial (Week 3) FEM11056 13 Nov 2014 1 / 101

SPNE: NE is played in each subgame.

Tutorial (Week 3) FEM11056 13 Nov 2014 2 / 101

A game obtained from the entire game.

Tutorial (Week 3) FEM11056 13 Nov 2014 3 / 101

Question 4 from 2011 midterm exam.

Each year Q4 of the midterm is similar to this...

Here, there is only 1 subgame: I-set of P2 is not singleton.

Tutorial (Week 3) FEM11056 13 Nov 2014 4 / 101

Q1. Classify this game?

Dynamic game (P1 moves …rst, then P2).

Imperfect information game (P2 does not observe whether P1 played

Tutorial (Week 3) FEM11056 13 Nov 2014 5 / 101

Q2 What is the most appropriate solution concept for this type of

Dynamic game...thus, always SPNE.

Tutorial (Week 3) FEM11056 13 Nov 2014 6 / 101

Q3 Report all such EQ.

How to …nd NE? Always from the normal form.

Tutorial (Week 3) FEM11056 13 Nov 2014 7 / 101

Q4 Draw the Normal form.

First need to list out each player’s strategies:

P1 has 3 (L, M,R) and P2 has 2 (l, r ).

Tutorial (Week 3) FEM11056 13 Nov 2014 8 / 101

The Normal form is,

Tutorial (Week 3) FEM11056 13 Nov 2014 9 / 101

Q5 Compute all pure NE.

To …nd pure NE, underline all BRs.

2 pure NE: (L, l ) =) (4, 3) and (R, r ) =) (2, 0)

Tutorial (Week 3) FEM11056 13 Nov 2014 10 / 101

Q6 Compute all mixed NE.

Always start by eliminating strictly dominated strategies...

As mentioned last week, a strategy can be strictly dominated by a

You can eliminate both, NBR and weakly dominated .

Tutorial (Week 3) FEM11056 13 Nov 2014 11 / 101

An appropriate mix of L and R might strictly dominate M. (note M

The reduced form matrix:

Now we look for a mix NE...

Tutorial (Week 3) FEM11056 13 Nov 2014 13 / 101

Let P2 play a mix (q, 1 q ). Then,

P1s expected payo¤s are,

Tutorial (Week 3) FEM11056 13 Nov 2014 14 / 101

Three regions, gives three cases:

Tutorial (Week 3) FEM11056 13 Nov 2014 15 / 101

Then U1 (L) > U1 (R ) =) P1s BR is to play L

What is P2 best response to L =) to play l =) q = 1.

Mixed NE: ((1, 0, 0) , (1, 0)) = (L, l ) =) (4, 3).

Clearly, this is a pure NE as well...however, you must report it on your

Tutorial (Week 3) FEM11056 13 Nov 2014 16 / 101

Tutorial (Week 3) FEM11056 13 Nov 2014 17 / 101

Then U1 (L) < U1 (R ) =) P1s BR is to play R.

What is P2 best response to R? Any q 2 [0, 1]

But R is BR of P1 only if q 2 [0, 13 ).

Thus, mixed NE: ((0, 0, 1) , (q, 1 q )) =) (2, 0) where q 2 [0, 13 ).

Tutorial (Week 3) FEM11056 13 Nov 2014 18 / 101

The three mixed NE are:

3 ((0, 0, 1) , (q, 1 q )) =) (2, 0) where q 2 [0, 31 )

Note, mixed NE 2 and 3 can also be reported as,

Tutorial (Week 3) FEM11056 13 Nov 2014 19 / 101

There is also another way to …nd mixed NE.

Tutorial (Week 3) FEM11056 13 Nov 2014 20 / 101

Tutorial (Week 3) FEM11056 13 Nov 2014 21 / 101