Beruflich Dokumente
Kultur Dokumente
Lecture Notes 9
GAME THEORY AND STRATEGIC THINKING I:
Introduction and Game Theory in Static Settings
By Jo Seung-Gyu
1
Dixit, A. and B. Nalebuff (2008), The Art of Strategy, Norton, W.W. & Company
Dixit, A. and B. Nalebuff (1991), Thinking Strategically, Norton, W.W. & Company
David M. Kreps (1990), Game Theory and Economic Modelling, Oxford Univ. Press
Outline
Introduction
Opening Question:
What is the difference between the following two problems?
I want to choose the best jazz bar to refresh tonight.
I want to choose the best jazz bar while avoiding my
ex-girlfriend.
Introduction cont.
Game theory was developed in the early 1940s (in connection with
war strategies during the cold war era) and is concerned with the
formal study of rational decisions in strategic situations where conflict
interfaces with mutual dependence. Such situations are common both
within firms and in market actions among firms as well as in everyday
life.
price wars (e.g. collusion vs competition?) or trade wars (e.g.
managed trade vs free trade)
You broke up with your girl (boy) friend a week ago. And you
want her back. Should you call ahead or wait for her (his) call?
What is the winning strategy? More importantly, what matters
in your decision?
In these situations, players have their own objectives possibly in
conflict - but also share a mutual dependence.
Motivating Examples
Example 1: A Robbery at an LA Branch of Hanmi Bank
Source: http://www.koreadaily.com/news/read.asp?art_id=855394
Issues
Why is it a dilemma?
How to get out of the
dilemma?
Issues:
How can you be the ultimate winner?
FUNDAMENTALS OF A GAME
10
11
vs
Sequential Movement
Dynamic
Extensive Form Games
12
Information/Knowledge
Mutual Knowledge:
I know A is true and you know A is true
Common Knowledge:
I know A is true.
You know A is true.
I (You) know (I) you know A is true.
I (You) know you (I) know I (You) know . A is true.
Example
Outline
Introduction, Motivating Examples and
Fundamental of a Game
14
Introduction
Static Games in Normal (or Strategic) Form
The normal or strategic forms are usually presented through a game
matrix highlighting the following three key aspects of the strategic
situation:
The players and their identities
The feasible strategy set for each player
The payoffs associated with each strategy profile
Players make decisions without knowing what others did, thus
simultaneous movement game.
15
16
Outline
Introduction, Motivating Examples and
Fundamental of a Game
Strategic Thinking in Static Games
Introduction
Pre-Nash Equilibrium Concepts
17
18
Formalization:
Concept of Dominance:
COMMANDMENT
19
You can charge high or low. All charging a high price would be the
best for both, but Charge Low is a dominant strategy.
Real Life Example:
Fruit price war in Ang Mo Kio (Singapore): Two shops lost
$30,000 and $50,000 over 5 days of price war.
20
Analogy:
-
Over-weight in Sumo?
21
During my trip to Moscow last spring, I noticed substantially many ladies are
wearing high very high heels. I asked a local lady why and the returning
answer was:
After the revolution, there were fewer males than females. And there
was a competition among ladies to look attractive High heel was
one answer.
22
Shafted cont.
Suppose the two finalists were playing for 150,000.
If both players decided to shaft, then both players would walk away emptyhanded.
If one decided to share and the other decided to shaft, then the person who
shafted would win all the money.
If they both decided to share, they split the money and would each get 75,000
in this case.
.
share
shaft
share
50%, 50%
0%, 100%
shaft
100%, 0%
0%, 0%
24
Shafted cont.
Now, lets get live through the YouTube Video and see how two contestants
play the game over 217,000!!
First half of the episode:
http://www.youtube.com/watch?v=X6rwrr-opEs
Second half:
http://www.youtube.com/watch?v=OmcRvtSCows
25
Outline
Introduction, Motivating Examples and Fundamentals of
a Game
Strategic Thinking in Static Games
Introduction
Pre-Nash Equilibrium Concepts
o Dominant Strategy Equilibrium
26
27
Example:
FirmA
FirmA
Middle
Bottom
FirmA
Top
Middle
Bottom
Left
3, 6
5, 1
6, 0
FirmB
Center Right
7, 4 10, 1
8, 2 14, 6
6, 2
8, 5
FirmB
Left Center Right
5, 1
8, 2 14, 6
6, 0
6, 2
8, 5
FirmB
Right
Middle 14, 6
Bottom 8, 5
FirmB
Right
FirmA
Middle
14, 6
28
Outline
Introduction, Motivating Examples and Fundamental of
a Game
Strategic Thinking in Static Games
Introduction
Pre-Nash Equilibrium Concepts
o Dominant Strategy Equilibrium
o Iterated Dominance Equilibrium
29
30
Top
Left
10, 4
Player B
Right
8, 15
A's Min
100
Player A
Bottom
100, 5
20, 10
B's Min
10
RIGHT is a dominant strategy for player B. Given this, player A will choose
BOTTOM. (This is the only Nash equilibrium of the game, as to be seen later.)
However, what if player A doubts player Bs rationality? That is, what if
player A thinks there is a slight chance for player B to choose LEFT?
-
Then player A may choose Top in fear of the disastrous outcome of (-100,
5). By doing this, A can guarantee herself 8, regardless of Bs choices.
Such risk-averse attitude may force the players to choose the strategies to
maximize among the guaranteed minimum payoffs. Player A will choose Top
since it guarantees her the higher minimum payoff than Bottom. By the same
token, Player B will choose Right. This may justify (TOP, RIGHT) as a possible
game outcome, which we call maximin strategy equilibrium (outcome).
31
Outline
Introduction, Motivating Examples and Fundamental of
a Game
Strategic Thinking in Static Games
Introduction
Pre-Nash Equilibrium Concepts
o Dominant Strategy Equilibrium
o Iterated Dominance Equilibrium
o Maximin Strategy Equilibrium
Nash Equilibrium
Application: Rational Pigs
33
NASH EQUILIBRIUM
For the majority of games, modelers use the Nash
equilibrium (named after a Princeton Mathematician
and 1994 Nobel laureate John F. Nash).
This is the most important and most frequently
encountered equilibrium concept, albeit it contains its
own imperfectness.
The dominance concept was about What strategies would a rational player always
play or never play?
In contrast, Nash equilibrium is motivated by the question What properties must a
game equilibrium have?
The Core idea suggested by John Nash was:
-
34
Rabbit
Stag
5, 5
0, 1
Rabbit
1, 0
1, 1
Hunter A
Put yourself in your rivals shoes. That is, choose your best response to each
of your rivals potential choices
Blue Hunter As best response
Green Hunter Bs best response
We have Two Nash in this game: (Stag, Stag) and (Rabbit, Rabbit)
Naturally, neither player has an incentive to deviate.
35
Player 1
A
B
C
D
E
F
9,9
7,8
5,6
3,9
1,2
G
7,1
5,2
3,3
1,9
9,8
Player 2
H
5,6
3,6
1,8
9,4
7,7
I
3,4
1,4
9,7
7,9
5,6
J
1,1
3,3
1,5
5,9
3,7
Use dots (or underlines or circles) to specify player 1s best response and
player 2s best response.
Player 2
F
G
H
I
J
A
9,9
7,1
5,6
3,4
1,1
B
7,8
5,2
3,6
1,4
3,3
Player 1 C
5,6
3,3
1,8
9,7
1,5
D
3,9
1,9
9,4
7,9
5,9
E
1,2
9,8
7,7
5,6
3,7
You can see there are three Nash: (A, F), (E, G) and (D, J)
-
Sports:
Law Enforcement:
Olympic Games:
Definition: For any given set of pure strategies, mixed strategies are
rules that tell a player with what percentage to play each pure strategy.
39
Nadal is serving to Federer and is deciding between down the line (DL)
and cross court (CC).
Federer
CC
DL
50, 50
80, 20
CC
90, 10
20, 80
Nadal
Notes:
-
Finding Nash equilibrium in mixed strategy goes beyond our level, so well skip.
40
Outline
Introduction, Motivating Examples and Fundamental of
a Game
Strategic Thinking in Static Games
Introduction
Pre-Nash Equilibrium Concepts
o Dominant Strategy Equilibrium
o Iterated Dominance Equilibrium
o Maximin Strategy Equilibrium
Nash Equilibrium
41
Two rational pigs, one big (called Napoleon) and the other small (called
Pinkie), are put in a cage. There is a button at one end of the cage and food
dispenser at the other end which dispenses 10g of food when button is
pressed.
Now if the pigs want food, they need to press the button; the pig that pressed
the button must run to the food dispenser while the other pig has started to eat.
Napoleon, being big and dominant, can eat all the food remaining once it
reaches the dispenser. So Pinkies only chance to eat is when she reaches
food before Napoleon, yet still need to subordinate to Napoleon once he
arrives. Pressing the button and running to the food dispenser involves calorie
expenditure, which costs 2g to each pig.
42
(1,7)
----------
(5,1)
----------
(0,0)
43
Why?
Lesson:
At times, a weakness can be a strategic strength and vice versa.
-
Once agreed, an individual member has a unilateral incentive to disobey the agreed
quota and produce more to take advantage of the supported oil price.
If the rest of OPEC obeys, Saudi Arabia also has an incentive to cheat.
But if the rest of OPEC do not obey its cartel quota (and produced too much), it is still
in the Saudi's interest to keep to its cartel quota (since SAs share is too big and SA
had better support the oil price by reducing its own production)
disobeycartelquota
Saudi
Aribia
obeycartelquota
RestofOPEC
disobeycartelquota
Obeycartelquota
LOW,LOW
MODERATE,VERYHIGH
VERYHIGH,VERYLOW
HIGH,HIGH
Highlight
SAs strength in market
power may turn into the
weakness in strategic power.
45
46