Game Theory - Week 2

Strategy: An Introduction
to Game Theory
Week 2: Commons, Mixed Strategies
TA: Arti Agarwal

Recap
v Notation
v Best Response
v Nash Equilibrium
v Pareto Optimality
v Dominant Strategies
2
Tragedy of Commons
Two herds of livestock use the same pasture for grazing. The size of
pasture is limited, normalized to 1. Let x1 and x2 denote the intensity of
grazing by the two herds such that 0 < xi < 1 and x1 + x2 < 1. Assume
that the cost of looking after each herd while grazing, to the owners, is
c*xi where where c is a positive constant. Each herd gets the benefit of
grazing in proportion of its intensity of grazing. Find the N.E. values of
xi. Is the N. E. Pareto Optimal?
3
Renewable Resource
Suppose now that there is a fishery of size y = 1. Each player extracts
an amount xi in the first period, i = 1, 2. Whatever is not extracted, that
is, the amount y − x1 − x2, regenerates and becomes an amount equal
to √(y − x1 − x2) in period 2. Find the Nash equilibrium.
[Dutta Ch8, Ex 8.2]
4
N Players
Suppose now that there are N players in the grazing problem game,
and costs are negligible. Intensity of grazing of a herd in question is x1.
All other herds graze with the same intensity x. Show that the “tragedy
of commons” game leads to complete depletion of the pasture and
compute the Nash Eqbm strategies.
[Dutta Ch8, 8.4]
5
Chicken Game
Two players driving their

P2
Straight Swerve cars against each other
P1
must decide whether to
swerve or not.
Straight 0,0 3,1
[Garcia et. al, Ch3, Ex 1]
Swerve 1,3 2,2
6
Mixed Strategies
v A player will choose a mixed strategy

P2 only when it gives a higher expected
Straight Swerve
P1 payoff than some pure strategy.
v A player will choose a mixed strategy
Straight 0,0 3,1
when the likelihood of their opponent
choosing some strategy is not known.
Swerve 1,3 2,2 v A mixed strategy is when a player
randomly picks any of the available
strategies. 7
Squash
Imagine that you are playing the game of
P2 squash. In the middle of a rally, you have to
F B
P1 decide whether to position your next shot in
the front (f) of the court or to the back (b).
f 0.2 0.8
Your opponent likewise has to move in
anticipation of your shot; s/he could move
b 0.7 0.3 forward (F) or backward (B). In the following
matrix are displayed your chances of
[Dutta Ch9] winning the rally in the four possible cases.

Find the msNE.
8
Rock Paper Scissors
P2
R P S
P1
R 0,0 -1, 1 1, -1
P 1, -1 0, 0 -1, 1
S -1, 1 1, -1 0,0
9
Up, Middle, Down
P2
Two players have payoffs
L C R
P1 given in the table. Find
Up 3,2 2,1 1,3 the Mixed Strategy NE

(msNE).
Middle 2,1 1,5 0,3
Down 1,3 4,2 2,2
10
Penalty Kick
Goalie
l m r
Kicker
The game table shows the chances
of landing a goal for the soccer L 0.4 0.5 0.9
playing taking the penalty kick. Find
the Mixed Strategy Nash M 0.5 0.2 0.5
Equilibrium.
R 0.9 0.5 0.3
[Dutta Ch9]
11
Lobbying Game
Two firms simultaneously and independently
F2
decide whether to lobby Congress in favor a Not
Lobby
Lobby
F1
particular bill. When both firms lobby, Congress’
decisions are unaffected. Each firm earns a profit
Lobby -5, -5 15, 0
of 10 if none of them lobbies and −5 each if
both choose to lobby. If only one firm lobbies its
Not
payoff is 15 (since it is the only beneficiary of the Lobby
0, 15 10, 10
policy), while that of the firm that did not lobby
is zero. Find pure strategy NE and msNE. [Garcia et. al, Ch3, Ex 2]
12
Two Firms
Consider two competing firms in a declining industry that cannot support both firms
profitably. Each firm has three possible choices as it must decide whether or not to
exit the industry immediately (E), at the end of this quarter (T), or at the end of the
next quarter (N). If a firm chooses to exit then its payoff is 0 from that point onward.
Every quarter that both firms operate yields each a loss equal to −1, and each
quarter that a firm operates alone yields a payoff of 2. For example, if firm 1 plans to
exit at the end of this quarter while firm 2 plans to exit at the end of the next quarter
then the payoffs are (−1, 1) because both firms lose −1 in the first quarter and firm 2
gains 2 in the second. The payoff for each firm is the sum of its quarterly payoffs.
Represent the game in matrix form. Find the pure strategy NE and msNE.
13
Two Firms
F2
E T N
F1
E 0,0 0, 2 0, 4
T 2, 0 -1, -1 -1, 1
N 4, 0 1, -1 -2, -2
14
Reference Reading
1. Games of Strategy (3e to 5e) by Avinash Dixit, Susan Skeath, David Reiley.
Ebook link (partial)
2. An Introduction to Game Theory by Martin Osborne
3. Strategies and Games. Theory and Practice by Prajit K. Dutta
4. Strategy and Game Theory Practice Exercises with Answers by Felix
Munoz-Garcia, Daniel Toro-Gonzalez
5. Introduction to Economic Analysis v 1.0 by R. Preston McAfee.
15
If you have questions,
please contact:
arti21@iitk.ac.in
16

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Strategy: An Introduction

TA: Arti Agarwal

[Dutta Ch8, Ex 8.2]

[Dutta Ch8, 8.4]

Two players driving their

Swerve 1,3 2,2

v A player will choose a mixed strategy

[Dutta Ch9] winning the rally in the four possible cases.

Up 3,2 2,1 1,3 the Mixed Strategy NE

Down 1,3 4,2 2,2

Ebook link (partial)

2. An Introduction to Game Theory by Martin Osborne

3. Strategies and Games. Theory and Practice by Prajit K. Dutta

4. Strategy and Game Theory Practice Exercises with Answers by Felix

Munoz-Garcia, Daniel Toro-Gonzalez

5. Introduction to Economic Analysis v 1.0 by R. Preston McAfee.

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