EC220 - Game Theory

Slide Pack 10: Wrap-up

Costas Cavounidis

EC220 - Game Theory - Warwick - 2019/20

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Summary: Game Types and Solution Concepts

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Static Games of Complete Information

A static game of complete information has players, actions for

each player, the utility function of each player.
• Normal Form representation for finite games
• Simultaneous Play
• Pure and Mixed strategies

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Solving Static Games of Complete Information

A Strictly Dominant Strategy for i is a strategy si such that

for all alternative strategies si0 and any profile of others’
strategies s−i we have that E[ui (si , s−i )] > E[ui (si0 , s−i )].

A strictly dominant strategy does better than the rest regardless

of what one’s opponents are doing.

Solution Concept: Strictly Dominant Strategy Equilibrium.

A strategy profile such that each player’s strategy is strictly
dominant, doing better than every other strategy regardless of
opponent actions.

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Solving Static Games of Complete Information

A Strictly Dominated Strategy for i is a strategy si such that

there is an alternative strategy si0 such that for any profile of
others’ strategies s−i we have that E[ui (si , s−i )] < E[ui (si0 , s−i )].

Iterated Elimination of Strictly Dominated Strategies is the

process of removing strategies that are strictly dominated, then
repeating until no more strategies can be removed.

Solution Concept: Iterated Elimination Equilibrium. When

only one strategy profile survives IESDS, it is an Iterated
Elimination Equilibrium.

Problem: Often, neither a SDSE or an IEE exist.

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Solving Static Games of Complete Information

A Best-Response of i to a profile of opponent strategies s−i is

a strategy si such that for any alternative strategy si0 , we have
that E[ui (si , s−i )] ≥ E[ui (si0 , s−i )].

Often, multiple best responses to a single s−i exist.

With differentiable utility functions and continuum pure action

sets, we can often find these by taking a First Order Condition,
and then checking the Second Order Condition.

Solution Concept: Nash Equilibrium. A profile of strategies s

such that for each i, we have that si is a best-response to s−i .

Every SDSE is a IEE. Every IEE is a NE.

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Solving Static Games of Complete Information

A finite game has finitely many players and pure actions for
each player.

The Nash Existence Theorem states that every finite game

has at least one (potentially mixed) Nash Equilibrium.

In finite games, the underlining method will find every pure NE.

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Dynamic Games of Complete Information

Static game of complete information plus information sets

• Extensive Form representation for finite games
• Strategies vs. actions
• Nodes characterize all previous actions
• Information sets are collections of nodes the acting player
can’t distinguish between.
• A strategy now gives an action at each own info set; it is a
complete contingent plan.

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Solving Dynamic Games of Complete Information

Can put game in Normal Form and solve for Nash Equilibria.

BUT off-path play may be sequentially irrational.

• Equilibria with incredible threats etc.

Sequential Rationality: At each information set, a player plays

a best-response to the others’ strategies from then on.

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Solving Dynamic Games of Complete Information

A Subgame is a node and all its descendant nodes, such that

no descendant’s information set has nodes outside these
descendant nodes.

A subgame is a self-contained game starting at some node of

the original game.

Solution Concept: Subgame Perfect Nash Equilibrium.

A Nash Equilibrium strategy profile that also induces a Nash
Equilibrium in every subgame.

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Solving Dynamic Games of Complete Information

To find SPNEs, use Backwards Induction: start at the terminal

subgames of the game, identify NE there, and work your way
up the extensive form.

If a finite dynamic game of perfect information (all information

sets are singletons) never offers the same payoff to the same
player, it has a unique SPNE.

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Static Games of Incomplete Information

Static game of complete information plus types

• Types can enter players’ utility functions
• Types represent differences in information about the game
• Strategies are now type-contingent

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Solving Static Games of Incomplete Information

Harsanyi’s solution: add another parameter, a common prior

distribution over the players’ different types. "Nature"

Solution Concept: Bayes-Nash Equilibrium. A strategy

profile such that each type of each player best-responds to the
profile of opponent strategies after updating the common prior
based on their type.

In other words, a BNE is a strategy profile s such that for each

i, type θi of i, and alternative action ai0 , we have that

E[ui (si (θi ), s−i (θ−i ), θ)|θi ] ≥ E[ui (ai0 , s−i (θ−i ), θ)|θi ]

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Dynamic Games of Incomplete Information

Dynamic game of complete information plus types

• Info sets now also used to track type information

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Solving Dynamic Games of Incomplete Information

Can solve using BNE.

Problem: BNE may give sequentially irrational predictions

there, just as NE did.

But no proper subgames! So subgame perfection has no bite.

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Solving Dynamic Games of Incomplete Information

What node does the active player thinks he’s at?

System of beliefs: For each information set, a probability

distribution over it’s nodes.

Solution Concept: Perfect Bayesian Equilibrium

A BNE in which each player is playing a best-response at each
of her information sets, given their beliefs over the nodes in that
information set. Beliefs restricted:
• Given by Bayes’ Rule using the prior and strats on-path
• Arbitrary off-path

By definition, every PBE is a BNE.

PBE gives Sequential Rationality in games of Incomplete Info!

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The Cho-Kreps Intuitive Criterion

Many PBEs seem fishy!

We can eliminate some by applying the Intuitive Criterion.

Is there some song some type could sing, that it would sing if
doing so revealed it’s type? Is it the case that no other type
would want to sing that song no matter what this did to beliefs?

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Nash-based Solution Concept Summary

SR can fail SR does not fail

SPNE: Every-
NE: Everyone is one is best-
Complete info
best-responding responding in
each subgame
BNE: Every PBE: Every
type is best- type is best-
Incomplete info responding given responding at
prior updated on each info set
type given beliefs

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Summary: Applications

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Finitely Repeated Games

A Finitely Repeated Game is a dynamic game G(δ, T ) in

which the same static "stage" game G is played for T periods,
with utility exponentially discounted by δ ≤ 1.

If there is a unique NE of the stage game, repeating it at each

history is the only SPNE of the finitely repeated game.

If not, an SPNE can have behavior different than stage-game

Nash play.

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Infinitely Repeated Games

An Infinitely Repeated Game G(δ) is the same, only it

continues forever. Payoffs accrue along the way, and are
normalized by multiplication by (1 − δ).

Equivalence between per-period probability of breakdown

(1 − δ) and discounting at rate δ.

No final subgames, so can’t use Backwards Induction.

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Infinitely Repeated Games

A vector of payoffs v is feasible if it lies in the convex hull of the

pure action payoff points.

If δ is high enough, some strategy profile (equilibrium or not)

results in payoffs v .

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Infinitely Repeated Games

Playing a given Nash Equilibrium of the stage-game at every

history is an SPNE of the repeated game.

Nash Reversion strategies give a certain on-path play, and if a

deviation occurs, revert to playing a Nash Equilibrium of the
stage-game forevermore. Which NE they revert to can depend
on the history.

The Friedman Folk Theorem establishes that if a feasible

payoff vector v gives each player a payoff better than that
player’s worst stage-game Nash payoff, for high enough δ, v is
the payoff of some SPNE of G(δ).

Furthermore, such an SPNE can be constructed using Nash

Reversion.

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Infinitely Repeated Games

Player i’s minmax payoff wi is the worst payoff she can get in
the stage-game G given that i is best responding.

wi = min max ui (ai , α−i )

α−i ∈×j6=i ∆Aj ai ∈Ai

The Fudenberg-Maskin Folk Theorem establishes that, if v is

a feasible payoff vector and vi > wi for all i, then v is the payoff
of some SPNE of G(δ).

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Signaling Games

A signaling game is a dynamic game of incomplete information

with two players:
• A sender with multiple possible types who acts first; and
• A receiver with only one type that observes the sender’s
action (but not her type) and then acts.
We often refer to the sender’s action as the message.

A pooling equilibrium is a PBE in which all types of sender

send the same (potentially mixed) message.
A separating equilibrium is a PBE in which no two sender
types ever send the same message.

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Information Aggregation

Information Aggregation refers to the extent to which, in

equilibrium, individual players’ information is combined into
outcomes.

In the sequential restaurant-choice game, in the PBE an

information cascade would eventually form and squelch
aggregation of all future information.

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Reputation

Reputation models are dynamic settings in which players may

have incentives to convince other players they are of a certain
type - whether or not this is true!

In finitely-repeated settings, even if ‘behavioral’ types are

unlikely, very different results than with single type.

In infinitely repeated settings, patient players build reputation

even if ‘behavioral’ types are unlikely. Such a player does well
in every equilibrium, undoing folk-theorem-style results!

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Thanks for Playing!

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