Classifying games

Are the moves in the game sequential or simultaneous?

Moves in chess are sequential, whereas in an auction for a portion
of the airwaves spectrum or an oil-drilling lease, bids are made
simultaneously
If sequential, your choice is governed by its future consequences;
if simultaneous, you must figure out what your opponent is doing
right now
Are the players interests in total conflict or is there some
commonality?
Games can be zero-sum or constant-sum (chess, football,
gambling): when you have to divide a gain
In business, they are often not zero-sum: there can be synergies
and cooperation (joint-ventures), or Pyrrhic victories (business
takeovers, auction bidding)
Often a tension between conflict and cooperation
 Classifying games
Is the game played once or repeatedly, with the same or
changing opponents?
If one-shot, secrecy or surprise are likely to be important; players
are often unscrupulous and ruthless
If repeated, you can build a reputation, and cooperation might
reveal profitable in the long run
Do the payers have full or equal information?
There often are asymmetries: hence you might infer, conceal,
manipulate or sometimes convey information (like a breakthrough
in your R&D programs)
You want to release information selectively: signaling
Your opponent wants to filter the credible one: screening
 Classifying games
Are the rules of the game fixed or manipulable?
Voting agenda in corporate boards
Try to participate in the pregame where rules are settled
Are agreements to cooperate enforceable?
Etc
The courses line crosses all these questions
We begin the study of games with a separate presentation
of simultaneous and sequential moves games, in both the
discrete (finite number of strategies) and the continuous
(continuous sets of strategies) setup; and then mix the two
Simultaneous-move games

Dominant/dominated strategies
The prisoners dilemma
Nash equilibria
Multiplicity/inexistence of equilibria
 Simultaneous-move games
A game where you must choose your strategy
either at the same time as, or without knowledge
of an action already taken by, your rival
Business examples:
Choice of product design
Advertising campaign
Choice of cover story (by news magazines)
Other:
Football: goal-keeper vs kicker for penalty kicks
Military: missile/anti-missile trajectory programming
 Simultaneous-move games
When two players: draw a payoff matrix (normal
or strategic form)
Example: the Cold War (here we rank the four
possible outcomes; 0 for the worst, 3 for the best)

USSR A D
USA

A 1 , 1 3 , 0
D 0 , 3 2 , 2
 Simultaneous-move games
Some games are zero-sum; e.g., the goal-keeper
vs kicker, or the Stone/Scissors/Paper kids play:
L , C Stone Scissors Paper
Stone 0 , 0 1 , -1 -1 , 1
Scissors -1 , 1 0 , 0 1 , -1
Paper 1 , -1 -1 , 1 0 , 0
 Simultaneous-move games
Others are non-zero-sum; e.g., exploiting demand-
side economies of scale:

Tosh DOS UNIX

IBM

DOS 600 , 200 100 , 100

UNIX 100 , 100 200 , 600

 Simultaneous-move games
What are the optimal responses to the
adversarys strategies?
USSR A D
USA

A 1 , 1 3 , 0
D 0 , 3 2 , 2

Here each player has a dominant strategy: A

 Dominance
A strategy is said dominant when it is optimal to
play it whatever the opponents strategy
Rule: If you have a dominant strategy, play it!
If there exists a dominant strategy for one of the
two players, then the equilibrium of the game can
easily be forecasted: he is going to play it, and the
opponent is going to play its best response to it
 The prisoners dilemma
The Cold War game is a PD game:

P1 , P2 Deny Confess
Deny -1 , -1 -6 , 0
Confess 0 , -6 -3 , -3
Here both players have a dominant strategy
Both would have preferred the (unattainable)
cooperating outcome
 The prisoners dilemma
Characteristics of the PD:
Two strategies: cooperate or defect
Defect is the dominant strategy for both
The (D,D) equilibrium is worse for both than the
unattainable cooperative outcome (C,C): there is a
conflict between individual incentives and collective
interest (very classical)
The main question is how to avoid the (D,D) trap
(see lectures on repetition and reputation)
 The prisoners dilemma
Many business/economic games are PD
Cartels/ trade-unions
Price cuts in a price war (Bertrand game)
Advertising campaign
The macro game between the Government and
the Central Bank
The capacity game
 The prisoners dilemma
The advertising game:
Orange and SFR must independently decide how
heavily to advertise
Advertising is expensive but if you advertise
moderately and your opponent advertises heavily, you
loose and your competitor does well
O, S M H
M 12 , 6 5 , 9
H 15 , 1 7 , 3
 The prisoners dilemma
The macro game :
Expansionary fiscal policy reduces unemployment but
carries out a risk of inflation
Expansionary monetary policy means low interest rates
but again a risk of inflation
Voters like cheaper mortgage and dislike paying taxes,
hence the Government prefers expansionary policies
Central Banks are obsessed with fighting inflation
Hence both players have developed opposed
preferences about the adequate policies
 The prisoners dilemma
(Macro game continued) But the interests are not fully
opposed: the two sides debate over the relative merits of
combining one expansionary and one contractionary policy
Suppose that either way of mixing the policies have similar effects
on unemployment and inflation
Fiscal expansion and monetary contraction lead to large budget
deficit and thus high interest rates to finance it, hence (1) hurting
the automobile and construction sectors and (2) rising the dollar
and harm international competitiveness
Fiscal contraction and monetary expansion on the contrary would
lower both the interest rates and the dollar: both the government
and the Central Bank prefer this outcome
 The prisoners dilemma
(Macro game continued) Hence the payoff matrix

CB Easy money Tight money

Gvt

Balanced B 2 , 2 0 , 3
Deficit 3 , 0 1 , 1

Lots of countries have a loose fiscal policy and a

tight monetary policy
 The prisoners dilemma
The capacity game: two firms operate on a market
where demand is given by

Q 15 p
d

They have a capacity of producing 3 units a day;

the (unit) marginal cost is 3
They can expand their production capacity to 4
(small expansion) or 6 (large) units a day
It is the Cournot model! (With e.g., Saudi Arabia
playing against Iraq)
 The prisoners dilemma
Let us represent the strategic stakes:
SA , I 3 4 6
3 18 , 18 15 , 20 9 , 18
4 20 , 15 16 , 16 8 , 12
6 18 , 9 12 , 8 0 , 0
Here there is no dominant strategybut for
both, paying 6 is dominated by playing 4
 The prisoners dilemma
Hence you can erase the irrelevant
dominated strategy (large expansion):
B 3 4
A

3 18 , 18 15 , 20
4 20 , 15 16 , 16

Thus we are back to a PD

 Dominated strategies
A strategy is dominated if it is uniformly worse (in
the weak or strong sense) than some other strategy
Rule: Eliminate any dominated strategies from
consideration, and go on doing so successively
If during the process, any dominant strategies
emerge in the smaller games, they should be
chosen successively
Even if the procedure does not end in a unique
outcome, it will reduce the size and complexity of
the game
 Dominated strategies
Example : the missile-antimissile programming
An Iraqi (I) ship tries to hit a US ship (A)
The missile path is programmed at the launch and can
make sharp right-angle turns every 20 seconds (to avoid
the too obvious straight line)
The US ship can instantly launch an antimissile with
the same characteristics; however it can only fly for 1
minute (less fuel to allow for enough explosives to
ensure a damaging open-air blast)
 Dominated strategies
(continued missile-antimissile programming) Here is the
common grid that the projectiles can follow:
C
Within the fateful minute,
each player has 8 possible F
B
strategies, hence a total of
64 combinations, with, for
each combination, either a A E I
hit (H) or a miss (O) for the
US antimissile D H

G
 IFCB:1 IFEB:2 IFED:3 IFEH:4 IHGD:5 IHED:6 IHEB:7 IHEF:8
ABCF:1 H O O O O O O H
ABEF:2 O H H H O H H H
ABEH:3 O H H H O H H H
ABED:4 O H H H H H H H
ADGH:5 O O O H H O O O
ADEH:6 O H H H O H H H
ADEF:7 O H H H O H H H
ADEB:8 H H H H O H H H

For the US ship, the strategies 2,
3, 5, 6 are dominated (weakly) by
the strategies 4 and 8; strategy 1
is dominated by 8; and 5 by 4
Hence we can confine attention to
the rows 4 and 8
For the Iraqi ship, the strategies 2,
3, 4, 6, 7 and 8 are dominated
(weakly) by the strategies 1
and/or 5
Hence we can restrict attention to
the columns 1 and 5
 Dominated strategies
(continued missile-antimissile programming) The
reduced table of hits and misses:
I IFCB : 1 IHGD : 5
US

ABED : 4 O H
ADEB : 8 H O
 Nash equilibrium
The game can end up having no dominant
strategies, but still has a Nash equilibrium
Col L M R
Row

T 3 , 1 2 , 3 10 , 2
H 4 , 5 3 , 0 11 , 4
L 2 , 2 5 , 4 12 , 3
B 5 , 6 5 , 5 9 , 7
 Nash equilibrium
A Nash equilibrium is a couple of strategies such
that each players strategy is optimal with respect
to its opponents strategy
At such an equilibrium, no player has ex post any
incentive to unilaterally change ones strategy
The N.E. need not be the jointly best combination of strategies: (B,R)
yields payoffs (9,7) but isnt an equilibrium, absent cooperative
behavior
Nor does it require that the choice be strictly better than other choices
(e.g., compare (B,M) and (L,M))
 Nash equilibrium
Players think ahead, try to see through their rivals
strategies, and form beliefs on what they will do
Hence a Nash equilibrium can be defined as a set
of strategies (one per player) such that:
Each player has correct beliefs about the strategies of
the other, and,
The strategy of each is the best strategy for him/herself,
given his/her beliefs about the others strategies
 Nash equilibrium
The game can end up having two Nash equilibria

Tosh DOS UNIX

IBM

DOS 600 , 200 100 , 100

UNIX 100 , 100 200 , 600

This game is of the type battle of the sexes: it is

a coordination game (symmetric)
 Nash equilibrium
The chicken game
B Swerve Straight
A

Swerve 0 , 0 -1 , 1

Straight 1 , -1 -2 , -2
 Nash equilibrium
Sometime, equilibria can be differentiated
Line , Col. Right Left
Top 1 , 1 1 , 0
Bottom 0 , 1 2 , 2

One is said risk-dominant, the other one

Pareto-dominant
 Nash equilibrium
(missile-antimissile programming) In that game, there
is no Nash equilibrium in pure strategies
I IFCB : 1 IHGD : 5
US

ABED : 4 O H
ADEB : 8 H O
 Nash equilibrium
Other examples: goal-keeper vs kicker (football)
or server vs receiver (tennis), or

L , C Stone Scissors Paper

Stone 0 , 0 1 , -1 -1 , 1
Scissors -1 , 1 0 , 0 1 , -1
Paper 1 , -1 -1 , 1 0 , 0

One then plays a mixed strategy (random)

 Sequential-moves games

Backward induction
First/second mover advantage
Classroom interactions
 Sequential-moves games
These are strategic interactions in which there is a
clear order of play
Players take turns, and know what has happened
Rule: Look forward and reason backward
We will see:
When it is to a player advantage to move first, and
when second?
Players can devise strategic moves to manipulate the
order of play to their advantage
 Sequential-moves games
We use game trees (extensive form games), in which the
players, their actions, the timing of their actions, the
information about prior moves and all possible payoffs are
explicit
A tree is a set of action/decision nodes and branches
At some nodes, there might be uncertainty
There are different paths from the initial node to the final
payoffs at a terminating node
In PD games, the outcome is the same as when the game is
played simultaneously
 Backward induction
For the battle of the sexes, we get the following
game tree
Only one
of the two
DOS 600 , 200
Tosh
Nash
equilibria
DOS 100 , 100 survives
UNIX
IBM
DOS 100 , 100 You can force the
UNIX Pareto-dominant
Tosh outcome against
UNIX 200 , 600 the risk-dominant
one
 Backward induction
For the capacity game, the Nash equilibrium is not
the same anymore 3 18 , 18
Iraq 4 15 , 20
6 9 , 18
3
3 20 , 15
Iraq
SA 4 4 16 , 16
6 8 , 12
6 Stack-
3 18 , 9
4 elberg
Iraq 12 , 8
6 0, 0
 Backward induction
Reason by backward induction
1. From the terminal nodes, go up the tree to the first
parent node
2. Identify the best decision for the deciding player at
each node: the corresponding payoffs are the players
payoffs at that parent node
3. Resume at the step 1. unless there are no lower
decision node
 First/second-mover advantage
Back to the capacity game
SAs strategic move is to preempt the market by
unconditionally choosing a large expansion
In the sequential game, SAs capacity has
commitment value: it gives SA a first-mover
advantage
SA can benefit from limiting its freedom and take an
irreversible action
In some other interactions, there is an advantage
in being the follower; e.g., a company whose
catalogue comes out later can undercut its rival whose
prices were announced first
 First/second-mover advantage
Other instances of second mover advantage:
Games of pie-division: you split, I choose
Elections: let your rival campaign first and then
counter him
Product design: you have the freedom to imitate or
differentiate
These last instances are pie-division game of the
form: you show a point through which I must cut,
and then I cut (straight) and choose
This will be studied through the Hoteling model of
product differentiation
 First/second-mover advantage
The ultimatum game:
Card game, I have to divide $100 with each of you
The rule is common knowledge:
I make a take-it-or-leave-it offer
Either you accept or you refuse

accept (100-x), x

Offer x You
I

reject 0,0
 First/second-mover advantage
(ultimatum game continued):
If the first move is really irreversible, in theory, backward
induction indicates that all positive offers should be accepted,
hence I should make the smallest one
Experimental evidence (from sharing a dollar between college
students) is dramatically different
The most common offer is a 50/50 split: fairness is a focal point
Very few 75/25 offers are made, and when they are, they are often
rejected
This suggests that some other payoffs should be considered:
self-esteem, sense of fairness, ongoing relationship and indeed
anonymity of the game reinforces unfair offers.
 First/second mover advantage
A
The centipede game
Take Pass
How would you play
B
as A? as B? 1,0 Take Pass

The rollback reasoning A

0,2 Take Pass
indicates that the unique
outcome is that A takes his
3,0
dollar at the first node

But as in the ultimatum B

Take Pass
game, experiments show
other outcomes, like tacit
0,10 0,0
collusion: people care about
fairness and reputation
 Classroom interactions
Auctioning a 10 banknote
Rules
First bid: 0.5
Lowest step in bidding: 0.5
The auction lasts until the clock starts ringing
The highest bidder pays her/his bid to the auctioneer and
gets the 10 in return
The second-highest bidder also pays her/his bid to the
auctioneer but gets nothing
Escalation and entrapment Examples?
 Classroom interactions
Schellings game
Rules
You must pay 1 to play: write your name on a slip
If you play: vote C (cooperate) or D (defect)
Sign your ballot (and commit to pay entry fee)
If a proportion X of the voters vote C, then
Cs net payoff is (3X-1)
Ds net payoff if 3X
But you need not play at all
It is a prisoners dilemma