Solutions to Chapter 6 Exercises SOLVED EXERCISES

S1. Second-mover advantage. In a sequential game of tennis, the second mover will be able to

respond best to the first movers chosen action. Put another way, the second mover will be able to e ploit the information she learns from the first movers action. !owever, since there is no "ash equilibrium in pure strategies, no outcome is the result of the players mutually best responding. #he outcome reached will not be one that first mover would prefer, given the action of the second mover.

S$.

#he strategic form, with best responses underlined, is shown below. $ % ' 1 ) *,* 1,$ $,( & (,1

#here is a unique "ash equilibrium+ ,), %- with payoff ,*, *-. It is also the unique subgameperfect equilibrium.

S*.

#he strategic form is shown below.1 .oeing If in, then Peace 0irbus In 4ut 1*22m, 1*22m 2, 11b If in, then /ar 31122m, 31122m 2, 11b

#here are two "ash equilibria+ ,In5 If In, then Peace- and ,4ut5 If In, then /ar-. 4nly the first of these, ,In5 If In, then Peace-, is subgame perfect. #he outcome ,4ut5 If In, then /ar- is a "ash equilibrium but is not subgame perfect5 this equilibrium hinges on 0irbuss belief that .oeing will start a price war on

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0irbuss entry into the mar9et. !owever, .oeing lowers its own payoff by starting such a price war. #herefore threat to do so is not credible.

S(.

,a-

#he strategic form is+

#inman if ", then t " Scarecrow S 1, 2 1, 2 2, $ if ", then b $, 1

,b-

#he only "ash equilibrium is ,S5 if ", then t- with payoffs of ,1, 2-.

S:.

,a-

#he strategic form is as follows. #he initials of the strategies indicate which action each

player would ta9e at his first, second, and third nodes, respectively. #inman nnn """ ""S "S" "SS Scarecrow S"" S"S SS" SSS 2,1 2,1 2,1 2,1 $,* $,* (,: 1,2 nns 2,1 2,1 2,1 2,1 $,* $,* (,: $,$ nsn 2,1 2,1 2,1 2,1 $,* $,* *,$ *,$ nss 2,1 2,1 2,1 2,1 $,* $,* *,$ *,$ snn 2,1 2,1 2,1 2,1 :,( :,( :,( :,( sns 2,1 2,1 2,1 2,1 :,( :,( :,( :,( ssn 2,1 2,1 2,1 2,1 :,( :,( :,( :,( sss 2,1 2,1 2,1 2,1 :,( :,( :,( :,(

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Pure-strategy "ash equilibria are indicated by double borders. #he unique subgame-perfect "ash equilibrium is ,SS", nns-, with payoffs of ,(, :-. ,b#he remaining "ash equilibria are not subgame perfect because a player cannot credibly

threaten to ma9e a move that will give himself a lower payoff than he would otherwise receive. #he #inman would not play strategy nnn at his third node because 2 ; 1. Similarly, the twelve equilibria that arise when the #inman plays S on his first node are not subgame perfect, because if he plays " at that node he can e pect the higher payoff of :.

S7.

,a-

#he strategic form is as follows. #he initials of the Scarecrows strategies indicate which

action he would ta9e at his first, second, and third nodes, respectively. %ion < u %ion < d

#inman t """ ""S "S" "SS Scarecrow S"" S"S SS" SSS *,*,* *,*,* *,*,* *,*,* *,*,* *,*,* *,*,* *,*,* 1, 1 , 1 1, 1 , 1 1, 1 , 1 1, 1 , 1 b $,*,$ $,*,$ 2,2,$ 2,2,$ Scarecrow S"" S"S SS" SSS """ ""S "S" "SS

#inman t 1, 1 , 1 1, 1 , 1 1, 1 , 1 1, 1 , 1 1,$,( 2,$,2 1,$,( 2,$,2 b $,*,$ $,*,$ 2,2,$ 2,2,$ 1,$,( 2,$,2 1,$,( 2,$,2

Pure-strategy "ash equilibria are indicated by double borders. #he unique subgame-perfect "ash equilibrium is ,""", b, d-, with payoffs of ,$, * , $-.

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,b-

"ash equilibria ,S"S, t, u-, ,S"S, b, u-, ,SSS, t, u-, and ,SSS, b, u- are not subgame

perfect. %ion will not move u, because he e pects to earn ( from moving d, 9nowing that Scarecrow will not move S at his third node. ,"S", t, d- and ,"SS, t, d- are not subgame perfect because #inman cannot e pect Scarecrow to move S at his second node. ,S"", t, d- and ,SS", t, d- are not subgame perfect. Scarecrow cannot e pect #inman to move t, because #inman should e pect to receive a higher payoff from playing b. ,""S, b, d- is not subgame perfect because no one can e pect that Scarecrow would move S at his third node. S=. ,a#he game tree is+

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,b,c-

#he rollbac9 equilibrium for the game above is ,>ast, ?uess >ast-. #he game tree is+

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#he rollbac9 equilibrium is ,?uess >ast, 6urve-. ,d#he tree for the simultaneous game is+

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It can also be represented as the tree in part (c) with an information set between the pitchers two nodes. ,e#he game table, with best responses underlined, is+ .atter guess fast Pitcher fast curve 2.=2, 2.*2 2.@:, 2.1: guess curve 2.@2, 2.$2 2.7:, 2.*:

#here is no cell where both players are mutually best responding. #here is no "ash equilibrium in pure strategies.

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S@.

,a-

See table below. .est responses are underlined. #here are *7 "ash equilibria shown by

shading in the cells of the table.

18mily 6ontribute "ina )ont "ina

#0%I0 1+ 6666 $+ 666) *+ 66)6 (+ 6)66 :+ )666 7+ 66)) =+ 6))6 @+ ))66 A+ 6)6) 12+ )6)6 11+ )66) 1$+ 6))) 1*+ )6)) 1(+ ))6) 1:+ )))6 17+ ))))

66 *, *, * *, *, * *, *, * *, *, * (, *, * *, *, * *, *, * (, *, * *, *, * (, *, * (, *, * *, *, * (, *, * (, *, * (, *, * (, *, *

6) *, *, * *, *, * *, *, * *, *, * (, *, * *, *, * *, *, * (, *, * *, *, * (, *, * (, *, * *, *, * (, *, * (, *, * (, *, * (, *, *

)6 *, (, * *, (, * *, (, * $, $, 1 *, (, * *, (, * $, $, 1 $, $, 1 $, $, 1 *, (, * *, (, * $, $, 1 *, (, * $, $, 1 $, $, 1 $, $, 1

)) *, (, * *, (, * *, (, * $, $, 1 *, (, * *, (, * $, $, 1 $, $, 1 $, $, 1 *, (, * *, (, * $, $, 1 *, (, * $, $, 1 $, $, 1 $, $, 1

66 *, *, ( *, *, ( $, 1, $ *, *, ( *, *, ( $, 1, $ $, 1, $ *, *, ( *, *, ( $, 1, $ *, *, ( $, 1, $ $, 1, $ *, *, ( $, 1, $ $, 1, $

6) 1, $, $ $, $, $ 1, $, $ 1, $, $ 1, $, $ $, $, $ 1, $, $ 1, $, $ $, $, $ 1, $, $ $, $, $ $, $, $ $, $, $ $, $, $ 1, $, $ $, $, $

)6 *, *, ( *, *, ( $, 1, $ *, *, ( *, *, ( $, 1, $ $, 1, $ *, *, ( *, *, ( $, 1, $ *, *, ( $, 1, $ $, 1, $ *, *, ( $, 1, $ $, 1, $

)) 1, $, $ $, $, $ 1, $, $ 1, $, $ 1, $, $ $, $, $ 1, $, $ 1, $, $ $, $, $ 1, $, $ $, $, $ $, $, $ $, $, $ $, $, $ 1, $, $ $, $, $

,b-

/or9ing with the normal form of the game, use iterated dominance of wea9ly dominated

strategies to find the subgame-perfect equilibrium. >or #alia, strategy 1 is wea9ly dominated by strategy $, as are strategies *, (, 7, =, A, and 1$. #hat leaves strategies $, :, @, 12, 11, 1*, 1(, 1:, and 17. 4f these, 11 wea9ly dominates $5 11 also wea9ly dominates the rest and so must be #alias subgame-perfect equilibrium strategy. 4nce you determined this, you can determine that "inas )6 wea9ly dominates her 66, 6), and )) and so must be her subgame-perfect equilibrium strategy. >inally, 8milys ) dominates her 6. #he subgame-perfect equilibrium is B)66), )6, )C with payoffs ,*, *, (- to #alia, "ina, and 8mily5 this cell has a double border in the table above. 1#he set of strategies that leads to the subgame-perfect equilibrium is the only set in which all three women use strategies that entail choosing DrationallyE ,that is, choosing the action that leads to the best possible outcome from every possible decision node-. 0nother way to say this is that in *: of the *7 "ash equilibria, someone must use a strategy that is not subgame perfect. >or e ample, there is a "ash equilibrium in row 1, column : of the first ,left- table. #his is not subgame perfect, because #alias strategy, 6666, states that if she arrives at node d in >igure 7.11, she will choose 6 for a payoff of *

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rather than ) for a payoff of (. #his strategy cannot be subgame perfect for #alia, and the equilibrium in that cell cannot be the subgame-perfect equilibrium.

SA.

!ere is the larger tree+

S12.

,a-

#he game tree is+

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>riedas has two actions at one node, so it has two strategies. .ig ?iant has two actions at each of three nodes, so it has $ $ < ( strategies. #itan has two actions at each of four nodes, so it has $ $ $ $ < 17 strategies. ,b#he strategic form is+

>riedas 'rban .ig ?iant &ural .ig ?iant

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#itan '''' '''& ''&' '&'' &''' ''&& '&&' &&'' '&'& &'&' &''& '&&& &'&& &&'& &&&' &&&&

'' :, :, 1 :, :, 1 :, :, 1 :, :, 1 $, :, : :, :, 1 :, :, 1 $, :, : :, :, 1 $, :, : $, :, : :, :, 1 $, :, : $, :, : $, :, : $, :, :

'& :, :, 1 :, :, 1 :, :, 1 :, :, 1 $, :, : :, :, 1 :, :, 1 $, :, : :, :, 1 $, :, : $, :, : :, :, 1 $, :, : $, :, : $, :, : $, :, :

&' :, $, : :, $, : :, $, : (, (, * :, $, : :, $, : (, (, * (, (, * (, (, * :, $, : :, $, : (, (, * :, $, : (, (, * (, (, * (, (, *

&& :, $, : :, $, : :, $, : (, (, * :, $, : :, $, : (, (, * (, (, * (, (, * :, $, : :, $, : (, (, * :, $, : (, (, * (, (, * (, (, *

'' :, :, $ :, :, $ (, *, ( :, :, $ :, :, $ (, *, ( (, *, ( :, :, $ :, :, $ (, *, ( :, :, $ (, *, ( (, *, ( :, :, $ (, *, ( (, *, (

'& *, (, ( (, (, ( *, (, ( *, (, ( *, (, ( (, (, ( *, (, ( *, (, ( (, (, ( *, (, ( (, (, ( (, (, ( (, (, ( (, (, ( *, (, ( (, (, (

&' :, :, $ :, :, $ (, *, ( :, :, $ :, :, $ (, *, ( (, *, ( :, :, $ :, :, $ (, *, ( :, :, $ (, *, ( (, *, ( :, :, $ (, *, ( (, *, (

&& *, (, ( (, (, ( *, (, ( *, (, ( *, (, ( (, (, ( *, (, ( *, (, ( (, (, ( *, (, ( (, (, ( (, (, ( (, (, ( (, (, ( *, (, ( (, (, (

#he eight pure-strategy "ash equilibria are indicated by shaded cells. ,cStrategy '''& for #itan wea9ly dominates strategy '''', and it also wea9ly dominates every other strategy for #itan5 therefore '''& is #itans subgame-perfect equilibrium strategy. #hen for .ig ?iant, '' is wea9ly dominant, and >riedas choice is &. #he subgame-perfect equilibrium is B'''&, '', &C, with payoffs of ,:, :, $- to #itan, .ig ?iant, and >riedas. "ote that the possible equilibria produce two possible outcomes. #he first four equilibria produce an outcome in which >riedas is alone in the rural mall Fpayoffs are ,:, :, $-G5 the last four find all three stores in the rural mall Fpayoffs are ,(, (, (-G. #he subgame-perfect equilibrium is reasonable because each of the three stores ma9es the decision that is in its own best interest at every decision node that could possibly arise during the game ,even those nodes that do not arise when the equilibrium is played-. In the other seven equilibria, one store ,or more- uses a strategy in which, at some possible decision node, it ma9es a choice that lowers its own payoff. 4f course, these self-defeating choices do not arise when all

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three stores use their equilibrium strategies. In other words, these seven equilibria are supported by beliefs about off-the-equilibrium-path behavior.

S11.

,a-

In the simultaneous version of the game each store has only two strategies+ 'rban and

&ural. #he payoff table, with best responses underlined, is as follows+ >riedas < ' .ig ?iant ' ' #itan & $, :, : (, (, * :, :, 1 & :, $, : #itan & (, *, ( (, (, ( ' ' :, :, $ >riedas < & .ig ?iant & *, (, (

#he ', ', & equilibrium ,with payoffs :, :, $- are li9ely focal for #itan and .ig ?iant. >riedas would prefer the other equilibrium, but the big stores dont care if >riedas deviates from the ', ', & equilibriumHthey receive a payoff of : each no matter what >riedas does. #here is some ris9 for a the big stores+ if the other big store chooses & the one that plays ' will receive only *. #he &, &, & equilibrium ,with payoffs (, (, (- may be more attractive to a big store if it is ris9 averse5 if one of the other stores ,either >riedas or the other big store- deviates by choosing ' the big store choosing & is still guaranteed a payoff of (. ,b/hen all three stores request 'rban there is a one-third chance that #itan and .ig ?iant will be in 'rban while >riedas is alone in &ural, a one-third chance that #itan and >riedas will be in 'rban while .ig ?iant is alone in &ural, and a one-third chance that .ig ?iant and >riedas will be in 'rban while #itan is alone in &ural. #he e pected payoff when all three choose 'rban is thus+ ,1I*-,:, :, 1- J ,1I*-,:, $, :- J ,1I*-,$, :, :- < ,(, (, 11I*#he payoff table is the same as in part ,a-, with the e ception of the 'rban, 'rban, 'rban cell+ >riedas < ' .ig ?iant ' #itan ' (, (, 11I* & :, $, : #itan ' ' :, :, $ >riedas < & .ig ?iant & *, (, (

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&

$, :, :

(, (, *

&

(, *, (

(, (, (

#he "ash equilibria are ', ', ' ,with e pected payoffs (, (, 11I*- and &, &, & ,with payoffs of (, (, (-. #he &, &, & equilibrium seems more li9ely to be played not only because it represents a Pareto improvement ,>riedas e pected payoff is more while the e pected payoff of the big stores remains the same- but also because with the &, &, & equilibrium each store is guaranteed a payoff of ( even if one of the other stores deviates and plays '. ,c#he change in the payoff table causes an important change in the equilibria of the games found in parts ,a- and ,b-. #he randomiKed allocation of the two 'rban slots when all three stores choose 'rban in part ,b- greatly benefits the underdog >riedas. In fact, the increased e pected payoff for >riedas to play ' even when the other two stores play ' is so great that it becomes >riedas best response when the other two stores play '. #hus ', ', & ceases to be a "ash equilibrium, and ', ', ' becomes a new one.

S1$.

,a-

0s seen in 8 ercise S12 of 6hapter :, "ancys best response to Lonicas choice m is+

nM < 1 J mI( Lonica 9nows "ancys best-response rule, so when she chooses her m to ma imiKe her profit she can plug in ,1 J mI(- for n+ NM < ,(m J (,1 J mI(- J m,1 J mI(--I $ 3 m$ NM < *m J $ 3 ,=I@-m$ #he m hat ma imiKes NM is mM < 1$I=. "ancys best response is then nM < 1 J ,1$I=-I( < 12I= ,b/hen m < 1$I= and n < 12I= the profits are+

NM < ,(m J (n 3 mn-I$ 3 m$ < F(,1$I=- J (,12I=- J ,1$I=-M,12I=-GI$ 3 ,1$I=- $ < 17A I (A O *.((A NN < ,(m J (n 3 mn-I$ 3 n$ < F(,1$I=- J (,12I=- J ,1$I=-M,12I=-GI$ 3 ,12I=- $ < $1* I (A O (.*(= In 8 ercise S12 of chapter :, when Lonica and "ancy choose their effort levels simultaneously their profits are+

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NM < NN < @ I * O $.77= .oth Lonica and "ancy ma9e higher profits when Lonica commits to an effort level first, but "ancy e periences a greater increase in her profits. #his game thus has a second-mover advantage.

S1*.

,a-

#he game table for the first-stage game ,with best responses underlined- is+

"ancy yes Lonica yes no $.77=, $.77= (.*(=, *.((A no *.((A, (.*(= $.77=, $.77=

,b-

#here are two pure-strategy "ash equilibria+ ,yes, no-, and ,no, yes-.

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