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Chapter 6

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36 views17 pages

Chapter 6

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delazar.82
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 6

CO M B I NIN G S EQ U ENTI A L A N D S I M U LTAN EOUS M OV ES


Two-Stage Games and Subgames
➢CrossTalk and GlobalDialog can choose whether to invest $10 billion in the purchase of a fiber-optic
network.

➢ If one invests and the other does not, then the investor has to make a pricing decision for its telecom
services.

➢If both firms acquire fiber-optic networks and enter the market, then their pricing choices become a

second simultaneous-move game.

We have a “tree house” with multiple levels. The tree house can be solved backward.
The Tree House

➢First, solve the second stage.


Find dominated and dominant
strategies.

➢ Second, solve the first stage.


(It is a chicken game)
Two-Stage Games and Subgames
➢The second-stage pricing game is one part of the complete two-stage game.

➢It is also a full-fledged game in its own right, with a fully specified structure of players, strategies, and
payoffs.

➢It is called a subgame of the full game.

➢More generally, a subgame is the part of a multimove game that begins at a particular node of the
original game.

➢A multimove game has as many subgames as it has decision nodes.


Second Example: Football
➢Suppose the offense has just two
alternatives, a safe play and a risky play,
and the defense may align itself to counter
either of them. It is called a subgame of
the full game.

➢If the offense has planned to run the risky


2, −2
play and the quarterback sees the
defensive alignment that will counter it,
he can change the play at the line of
scrimmage.

Solve the game. Is there any Nash


equilibria?
CHANGING THE ORDER OF MOVES IN A GAME
What about games that could be played either sequentially or simultaneously?

How would changing the play of a particular game and alter the expected outcomes?

➢Sequential-move games become simultaneous if the players cannot observe moves made by their rivals
before making their own choices.

➢In that case, we would analyze the game by searching for a Nash equilibrium rather than for a rollback
equilibrium.
Changing Simultaneous-Move Games into Sequential-Move Games

I. FIRST-MOVER ADVANTAGE
Changing Simultaneous-Move Games into Sequential-Move Games

II. SECOND-MOVER ADVANTAGE

Can you think of any simultaneous-move game that has second-mover advantage if played sequentially?
Changing Simultaneous-Move Games into Sequential-Move Games

III. BOTH PLAYERS MAY DO BETTER


Changing Simultaneous-Move Games into Sequential-Move Games

III. BOTH PLAYERS MAY DO BETTER


Changing Simultaneous-Move Games into Sequential-Move Games

IV. NO CHANGE IN OUTCOME

Think about prisoners’ dilemma.


CHANGE IN THE METHOD OF ANALYSIS
A. Illustrating Simultaneous-Move Games by Using Trees

• Consider the game of the passing shot in tennis, where the action is so quick that moves
are truly simultaneous.

• we want to show the game in extensive form—that is, by using a tree rather than in a
table.

• The nodes within this oval or balloon are called an information set indicating the presence
of imperfect information for the player;

• We are in a simultaneous game. So the player must choose either DL at both the nodes in
this information set or CC at both of them.

• Redefine a strategy as a complete plan of action, specifying the move that a player would
make at each information set
CHANGE IN THE METHOD OF ANALYSIS
A. Illustrating Simultaneous-Move Games by Using Trees

➢Using the concept of an information set, we can formalize the concepts


of perfect and imperfect information.

➢A game has perfect information if all of its information sets consist of


singleton nodes.
CHANGE IN THE METHOD OF ANALYSIS
B. Showing and Analyzing Sequential-Move Games in Strategic Form

▪Suppose we want to show the sequential version of Congress-Fed game in normal or strategic form—that is, by using a payoff table.

▪Remember that a strategy is a complete plan of action, specifying the moves to be made at each node where it is a player’s turn to
move.
CHANGE IN THE METHOD OF ANALYSIS
B. Showing and Analyzing Sequential-Move Games in Strategic Form

➢The equilibrium found by using rollback is called a subgame-perfect equilibrium (SPE).

➢It is a set of strategies (complete plans of action), one for each player, such that, at every node of the game tree, whether or not the
node lies along the equilibrium path of play, the continuation of the same strategy in the subgame starting at that node is optimal for
the player who takes the action there.

➢More simply, an SPE requires players to use strategies that constitute a Nash equilibrium in every subgame of the larger game.

Think of the two Nash eq. in the previous slide. Which one is SPE?
THREE-PLAYER GAMES
Consider the street–garden game of Chapter 3. we

1. change the rules of the game from sequential to simultaneous moves

and then
THREE-PLAYER GAMES
And then

2. keep the moves sequential but show and analyze the game
in its strategic form.

Solve the game by eliminating weakly dominated strategies in


reverse order of the actual play.

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