Sequential Games Tian Ji Horse Race It is a story in the Warring States Period.

King Wei of Qi enjoyed racing horses with General Tian Ji. The horses of King Wei were better than General Tians. King Wei always won. There were usually three matches: Kings good horses vs Generals good horses; average vs average; and poor vs poor. Master Sun Bin observed that Generals horses were only slightly weaker than the Kings. He advised General Tian to match his poor horses against Kings good horses; his good against Kings average; and his average against Kings poor. Although Tian lost the rst match, he won the last two matches and the race. W/o Sun Bin: Generals GAP vs Kings GAP King won W/ Sun Bin: Generals PGA vs Kings GAP General won What advice will you give to King Wei? (Assuming that you were as smart as Sun Bin.) Simultaneous Game It is indeed a simultaneous game. The full analysis of it requires the construction of a game table as follows: GAP (I) 3,-3 1,-1 1,-1 -1,1 1,-1 1,-1 GENERAL TIAN GPA AGP APG PGA (II) (III) (IV) (V) 1,-1 1,-1 1,-1 -1,1 3,-3 1,-1 1,-1 1,-1 -1,1 3,-3 1,-1 1,-1 1,-1 1,-1 3,-3 1,-1 1,-1 1,-1 -1,1 3,-3 1,-1 -1,1 1,-1 1,-1 PAG (VI) 1,-1 -1,1 1,-1 1,-1 1,-1 3,-3

KING WEI

GAP (I) GPA (II) AGP (III) APG (IV) PGA (V) PAG (VI)

Sequential Game If it were a sequential game (King Wei moved rst), the analysis would be a lot simpler and could be illustrated with the game tree below:

-3 -1 -1 -1 1 -1 I II III IV V VI

-1

-3

-1

-1

-1

-1 1

I II III IV V VI General General I II King IV V VI General III

I II III IV V VI

-3 -1 -1 -1

General Matching Pennies

General

General

The full game tree of Tian Ji horse race is too complicated for pedagogical purpose. Ill use a much simpler game, called matching pennies, to introduce the basic concepts in sequential games. Matching pennies is a simultaneous game and is described by the following game table: KID 2 Head Tail 1,-1 -1,1 -1,1 1,-1

KID 1

Head Tail

Its sequential version is to assume, say Kid 1 moves rst, followed by Kid 2.

Kid 1

H Kid 2 H T H

T Kid 2 T

-1

-1

The game tree starts with initial node. The initial node of this game is the decision node of Kid 1. At this decision node, Kid 1 has two possible moves. Each of the possible moves is represented by a branch at the decision node. In this game, Kid 2 has two decision nodes. There are two possible moves at each of these decision nodes. The game ends after Kid 2 makes the move and reaches one of the terminal nodes. Payos of the two kids are given at each of the terminal nodes. (Nature will be added to a game tree when we deal with uncertainty below. The concept of information set will be introduced when we go through simultaneous games. Information set and nature together can be used to handle problems with information asymmetry.) Which kid has a winning strategy? What is it? Which strategy will the other kid use? Does Kid 2 have other strategies? Will it aect Kid 1s strategy? This illustration brings out backward induction, subgame perfect equilibrium, and the elaborate concepts of strategy and path of play in sequential games. Street Garden Game Lets now apply backward induction to solve the subgame perfect equilibrium of the street garden game in the textbook. There are three players: Emily (rst), Nina (second), and Talia (third). Maintenance of the street garden relies on voluntary contribution from the 3

three ladies. If two or all of them contribute, the garden will be pleasant. If one or none of them contributes, the garden will be too sparse. They prefer a pleasant garden to a sparse garden and prefer not to contribute if it does not aect the maintenance of the garden. Figure 3.6 Exercise: Apply backward induction to solve for the subgame perfect equilibrium of this game. What is the equilibrium strategy for Emily? Nina? Talia? What is the equilibrium path of play? What are the possible strategies of Emily? Nina? Talia? What are the possible paths of play? Does Emily have a rst mover advantage? Does a player always have a rst mover advantage in sequential games? Survivor Game Kelly, Rich, and Rudy are the three challengers left at the nal immunity challenge of one Survivor episode. They had to stand on an awkward support and lean to hold one hand in contact with a central pole, called the immunity idol. Anyone whose hand lost contact with the idol, even for an instant, lost the challenge; the one who hold on longest was the winner. Kelly was the strongest and Rich was also strong. Rudy was clearly not as strong as them. He was the oldest. More precisely, Kelly had .5 chance to win the immunity challenge; Rich .45; and Rudy .05. When the immunity challenge nished, the three challengers voted out one of them. The winner of the immunity challenged was immune from being voted out. After one of them was voted out, a jury picked the winner. Rudy was an honest and blunt person. He was very popular with the jury. It was believed that the jury would pick him as the million-dollar winner if 4

he was not voted out in the nal immunity challenge. Given the popularity of Rudy, the winner of the nal immunity who voted out Rudy would only have a .4 chance picked by the jury. After an hour and a half into the nal immunity challenge, Rich gured out that Kelly had a .9 chance to win the challenge and Rudy .1. He deliberately lost the challenge. Could you rationalize his strategy? Figure 3.11

FIGURE 3.6

The Street Garden Game

Games of Strategy, Third Edition

Copyright 2009 W. W. Norton & Company

FIGURE 3.11

Survivor Immunity Game Tree

Games of Strategy, Third Edition

Copyright 2009 W. W. Norton & Company