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ECON10232 - Micro - 2 - Game - Theory 1

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34 views61 pages

ECON10232 - Micro - 2 - Game - Theory 1

Uploaded by

Md Abdullah Al Siam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ECON10232/20232

Microeconomics 2

Game Theory
Game Theory
Game theory helps to model strategic behavior by agents who understand that
their actions affect the actions of other agents.
Some Applications of Game Theory
• the study of oligopolies (industries containing only a few firms)
• the study of externalities, e.g., using a common resource such as a fishery
• bargaining
• how markets work
What Is a Game?
A game consists of
• a set of players
• a set of strategies for each player
• the payoffs to each player for every possible choice of strategies by the
players.
Two-Player Games
A game with just two players is a two-player game.
We will study only games in which there are two players, each of whom can
choose between only two actions.
An Example of a Two-Player Game – 1
The players are called A and B.
Player A has two actions, called “top” and “bottom.”
An Example of a Two-Player Game – 2
Player B has two actions, called “left” and “right.”
The table showing the payoffs to both players for each of the four possible
action combinations is the game’s payoff matrix.
An Example of a Two-Player Game – 3
An Example of a Two-Player Game – 4
An Example of a Two-Player Game – 5
An Example of a Two-Player Game – 6
An Example of a Two-Player Game – 6
An Example of a Two-Player Game – 6
Dominant Strategy
This is an example of a dominant strategy. A dominant strategy is a strategy
for a player that is best no matter what the other player does.

In this example, T is a dominant strategy for A.

Similarly, L is a dominant strategy for B.


An Example of a Two-Player Game – 7
Another Example of a Two-Player Game – 2
Another Example of a Two-Player Game – 3
Another Example of a Two-Player Game – 4
Another Example of a Two-Player Game – 5
Another Example of a Two-Player Game – 6
Nash Equilibrium
A play of the game where each strategy is a best reply to the other is a Nash
equilibrium (NE).

Our example has two Nash equilibria: (T, L) and (B, R).
The Prisoner’s Dilemma – 1
To see if what we see in the play of a game are Pareto-preferred outcomes,
consider the famous example called the prisoner’s dilemma game.
The Prisoner’s Dilemma – 2
The Prisoner’s Dilemma – 3
The Prisoner’s Dilemma – 4
The Prisoner’s Dilemma – 5
Who Plays When? – 1
In both examples the players chose their strategies simultaneously.
Such games are simultaneous games.
Who Plays When? – 2
But there are other games in which one player plays before another player.
Such games are sequential games.

The player who plays first is the leader. The player who plays second is the
follower.
A Sequential Game Example – 1
A Sequential Game Example – 2
A Sequential Game Example – 3
A Sequential Game Example – 4
A Sequential Game Example – 5
Pure Strategies – 1

Recall that this game has two Nash equilibria: (T, L) and (B, R). Player A has been
thought of as choosing to play either T or B, but no combination of both—in
other words, as playing purely T or B. T and B are player A’s pure strategies.
Similarly, L and R are player B’s pure strategies.
Pure Strategies – 2
Pure Strategies – New Game
Mixed Strategies – 1
Instead of playing purely up or down, player A selects a probability
distribution (pT, 1–pT), meaning that with probability pT player A will play up
and with probability 1–pT will play down.

Player A is mixing over the pure strategies up and down.

The probability distribution (pT, 1–pT) is a mixed strategy for player A.


Mixed Strategies – 2
Similarly, player B selects a probability distribution (pL , 1–pL), meaning that
with probability pL player B will play left and with probability 1–pL will play
right.

Player B is mixing over the pure strategies left and right.

The probability distribution (pL, 1–pL) is a mixed strategy for player B.


Mixed Strategies – 3
Mixed Strategies – 4
Mixed Strategies – 5
Mixed Strategies – 6
Mixed Strategies – 7
Mixed Strategies – 8
How Many Nash Equilibria?
A game with a finite number of players, each with a finite number of pure
strategies, has at least one Nash equilibrium.

So, if the game has no pure strategy Nash equilibrium, then it must have at least
one mixed strategy Nash equilibrium.
Repeated Games
A strategic game is a repeated game if it is played once in each of a number
of periods.

What strategies are sensible for the players depends greatly on whether the
game
• is repeated over only a finite number of periods, or
• is repeated over an infinite number of periods.
Best response analysis
Best response analysis
• For each of the choices that the
other players might be making,
what is the best choice for this
player?

• We find each player’s best-


response strategy as a
function of the other players’
available strategies.
Best response analysis
Best response analysis
• Best response analysis is a
comprehensive way of locating
all possible Nash equilibria in a
game.
Best response analysis – game 1
Best response analysis – games 2 and 3
Best response analysis – game 4
Best response analysis – game 5
No equilibrium in pure strategies
Mixed strategies
Suppose Evert plays DL with probability 75%.

Navratilova’s payoff would be


if she plays DL, and
if she plays CC.

Evert’s payoff would then be


if Navratilova plays DL, and
if Navratilova plays CC.
Mixed strategies
Evert’s mixed strategy (3/4, 1/4) allows Navratilova to exploit it
and play DL, which gives Evert a lower expected payoff,
compared to 65, if Navratilova plays CC.
This is despite the fact that Evert’s mixed strategy has a higher
payoff compared to a pure strategy.

Evert’s mixed strategy must keep Navratilova indifferent


between DL and CC.
This is called the opponent’s indifference property, and is the
key to mixed strategy equilibria in non-zero-sum games.
Mixed strategies
Suppose Evert plays DL with probability 70%.

Evert’s payoff would then be


if Navratilova plays DL, and
if Navratilova plays CC.

The expected payoff is better than the pure strategy payoff, and
also better than the (3/4, ¼) mixed strategy payoff.

Is it Evert’s optimal or equilibrium strategy though?


Mixed strategies –
game 1
Two restaurants are
considering forming a
cartel!.. Find all the
equilibria in pure and/or
mixed strategies.
Dominic Toretto vs Deckard Shaw – Game of Chicken
What have you learned?
1. Games help us study and analyze choices.
2. Using Game Theory we can predict the behavior of agents.
3. Nash Equilibrium is a very powerful concept and result in economic
analysis.
4. Nash Equilibria may exist in pure strategies or mixed strategies.
5. There will always be at least one Nash Equilibrium in either pure or mixed
strategies.

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