Lecture 8 - Mixed Strategies

Watson - 11
Econ 106G Spring 2020

Mixed Strategies and Mixed Strategy Nash Equilibrium

We have seen many examples of games where Nash equilibria (in pure strategies) exist, e.g.
the Prisoners’ Dilemma, Cournot competition etc. However, the following game does not
admit a Nash equilibrium (in pure strategies).
Matching Pennies

2
a b
1 a 1, 1 1, 1
b 1, 1 1, 1
Whereas 1 gets a payo¤ of 1 for playing the opposite action of 2 and 1 for playing the
same action as player 2, player 2’s preferences are exactly reversed. Thus, none of the action
pro…les (a; a) ; (a; b) ; (b; a) ; (b; b) is a Nash equilibrium.
An alternative interpretation of the game is that it is a “Caribou-Inuit” game: Caribou
is player 1, and Inuit is player 2. Caribou is choosing a valey to pass through, and Inuit are
choosing a valley to hunt the caribou...
An alternative game is
“Rock, Paper, Scissors”

2
R P S
R 0, 0 1, 1 1, 1
1 P 1, 1 0, 0 1, 1
S 1, 1 1, 1 0, 0
No action pro…le in this game is a Nash equilibrium either. So what will players do in
these games?
Remember the interpretation of Nash equilibrium as a steady state. It is not necessary
that the same action is being played in every single round for a steady state. If from past
play player 1 knows that the opponent is equally likely to play a as b in “Matching Pennies”,
both of his two actions are equally good or bad. Thus we can consider either of them as a
best response. And if he thus in turn randomizes himself over his actions a and b (with even
odds) player 2 is actually indi¤erent between a and b. Thus it is reasonable to assume that
he randomizes as well.

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De…nition 1 A mixed strategy i is a probability distribution over Si . The probability with
which strategy si is chosen in the mixed strategy i is denoted by i (si ). An expanded strategy
set 4Si consists of all possible randomization over Si .

For example, you may decide which strategy to play by ‡ipping a coin in the above
example. Then your mixed strategy is

a with probability 0:5;

1 =
b with probability 0:5:

More generally, a mixed strategy (for player 1, say) in matching pennies is to pick a number
p and play a with probability p and b with probability 1 p. We will write this strategy
as (p; 1 p), or simply as p. Thus in matching pennies we have 4Si = [0; 1]. In “Rock-
Paper-Scissor” a mixed strategy (for player 1, say) consists in picking two numbers p; q
with p + q 2 [0; 1] and playing “Rock”with probability p, “Scissor”with probability q, and
“Paper” with probability 1 p q. Even more generally for any game where player i has
#Si strategies, a mixed strategy i of player i is de…ned by #Si numbers (the probabilities
with which each strategy is played) that add up to 1.
A pure strategy can be regarded as a special type of mixed strategy which picks an action
with probability 1.
We can now extend the de…nition of best responses and Nash equilibrium to mixed
strategies.

De…nition 2 Mixed strategy i is a best response to mixed strategies i if all pure strategies
si used by i , that is all si with i (si ) > 0, are best responses to i , that is si 2 BRi i ,
or equivalently
U i si ; i Ui s0i ; i for all s0i

De…nition 3 ( 1 ; :::; N ) is a Nash equilibrium in mixed strategies if every player’s strategy

i is a best response to i.

A mixed best response to i assign positive probability only to pure strategies si that are
themselves best responses to i . So in particular, when = ( 1; ; N ) is a mixed strat-
egy Nash equilibrium, strategy i cannot assign positive probability to strictly dominated
strategies, but only to rationalizable strategies.

How to Interpret Mixed Strategy Nash Equilibrium?

1. People really randomize. Examples for this are service in tennis, mixing in Rock Scissor
Paper. What would Inuit do in the past, when hunting caribou? They use divination:
throw antlers into the …re, look at the …rst crack that appears on them, and guard the
valley that it points to (see “The Story of Our Success, by J. Henrich).

2. A player changes his or her opponent every period (matching games). Probability of
action a = Ratio of population who plays a: A player’s action in equilibrium is a best
response to the distribution of actions in the population.

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Existence of Nash Equilibrium
It is known that a mixed strategy Nash equilibrium exists in every game with …nitely many
actions. For 2 by 2 matrix games this becomes clear from the best-response curves. Player
1’s best response curve connects the top and the bottom of the unit square. Player 2’s best
response curve connects the left and the right of the unit square. It is not di¢ cult to see that
best response curves must be continuous and therefore, by the intermediate value theorem,
they must cross.
The general proof relies on a …x-point theorem and was …rst proved by John Nash in
1951.

Find Mixed Strategy Nash Equilibria

Matching Pennies
Suppose player 1 plays the mixed strategy

a with probability = p
1 =
b with probability = (1 p)

BR2 ( 1 ) : For player 2,

U2 (a; 1) = p 1 + (1 p) ( 1) = 2p 1
U2 (b; 1 ) = p ( 1) + (1 p) 1 = 1 2p

If 1 2p > 2p 1, i.e. p < 12 , then BR2 = b. i.e. q = 0.

If 1 2p < 2p 1, i.e. p > 21 , then BR2 = a. i.e. q = 1.

If 1 2p = 2p 1, i.e. p = 12 , then BR2 = a, b, or any mixed combination. i.e. q 2 [0; 1]

since U2 (a; 1 ) = U2 (b; 1 ) = 0.

Suppose player 2 plays the mixed strategy

a with probability = q
2 =
b with probability = (1 q)

BR1 ( 2 ) : For player 1,

U1 (a; 2) = q ( 1) + (1 q) 1 = 1 2q
U1 (b; 2 ) = q 1 + (1 q) ( 1) = 2q 1

If 1 2q > 2q 1, i.e. q < 21 , then BR1 = a. i.e. p = 1.

If 1 2q < 2q 1, i.e. q > 21 , then BR1 = b. i.e. p = 0.

If 1 2q = 2q 1, i.e. q = 21 , then BR1 = a, b, or any mixed combination. i.e. p 2 [0; 1]

since U1 (a; 2 ) = U1 (b; 2 ) = 0.

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 q

BR1
1/2

BR2

1 p
1/2

Mixed NE: 1 = BR1 ( 2 ) and 2 = BR2 ( 1 ) yield p = q = 21 . i.e. player 1 plays the
mixed strategy
a with probability = 0:5
1 =
b with probability = 0:5
while player 2 plays the mixed strategy
a with probability = 0:5
2 =
b with probability = 0:5
In this equilibrium, all four outcomes of the game occurs with equal probabilities, and
each player gets an expected payo¤ of zero.

More General Games

In more general games with more than two players and more than two strategies per player,
mixed strategy equilibria may be hard to …nd because there are so many mixed strategies.
To reduce the possible strategies in such a case we can reduce the game by focusing on best
responses of each player, because a player would never use a strictly dominated strategy in
a mixed strategy equilibrium. We can then further reduce the game by focusing on best
responses to these best responses, and so on... So we can focus on rationalizable strategies
of the players. Consider the following game of entry into a new industry
Players: 4 …rms A; B; C; D
Strategies: Si = fEntry; N og
Payo¤s:

– ui (N o; s i ) = 0
– ui (Entry; s i ) = (s) ci where
Costs: cA = 100; cB = 300; cC = 300; cD = 500
Pro…ts per entrant as a function of # of entrants: (1) = 1000; (2) =
400; (3) = 250; (4) = 150

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 The …rst thing to observe is that Entry is strictly dominant for …rm A, because cA =
100 < (n) for n = 1; 2; 3; 4. Second, if …rm A enters, Entry is strictly dominated for …rm
D, because cD = 500 > (n) for n = 2; 3; 4.
So, we know that in equilibrium, A will enter and D will not, and can focus on …rms B
and C. The matrix of the reduced game is given by

C
E N
B E 50, 50 100, 0
N 0, 100 0, 0
This game has two pure strategy Nash equilibria, (N; E) and (E; N ), but there is also a
mixed strategy equilibrium. To see this, let q be the probability that C enters. Then B’s
expected utility is given by

UB (E; q) = 50q + 100 (1 q) = 100 150q

UB (N; q) = 0

The best response function is thus:

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E< p=1 if q < 2=3
BRB (q) = E; N p 2 [0; 1] if q = 2=3
:
N p=0 if q > 2=3

Analogously, if B enters with probabality p then C’s best response is

8
< E q=1 if p < 2=3
BRC (p) = E; N q 2 [0; 1] if p = 2=3
:
N q=0 if p > 2=3

Thus, in this reduced 2 2 game, (p = 2=3; q = 2=3) is a mixed strategy Nash equilib-
rium.
To summarize, the entry game has three Nash equilbria. In every equilibrium, …rm A
enters, and …rm D stays out. In one equilibrium, …rm B enters and …rm C stays out, in the
second equilibrium, …rm C enters and …rm B stays out, and in the third equilibrium, both
B and C enter with probability 2=3.

Modi…ed Matching Pennies

2
a b
1 a 3, 1 1, 1
b 1, 1 1, 1

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 For this example, we solve the mixed strategy Nash equilibrium as follows:
BR1 (q) : For player 1,

U1 (a; q) = q ( 3) + (1 q) 1 = 1 4q
U1 (b; q) = q 1 + (1 q) ( 1) = 2q 1
so 8
< a p=1 if q < 1=3
BR1 (q) = a; b p 2 [0; 1] if q = 1=3
:
b p=0 if q > 1=3
BR2 (p) : the same as in Example 1.
Nash equilibrium: Given BR1 and BR2 , it is easy to check that p = 12 and q = 13
corresponds to the (mixed strategy) Nash equilibrium.
(Fun fact: apparently we are pretty bad at playing matching pennies, and in particular
responding to changes in opponent’s payo¤s. The reason, apparently, is that we are built to
copy others, which is how we learn and develop, rather than “mismatch”. Chimps are said
to be better than us in matching pennies! (see “Story of Our Success”, by J. Henrich).

Comparative Statics
One purpose of economic models is to understand how endogenous variables (here: players
strategies), depend on exogenous variables (here: payo¤s). This method allows us to study
how a policy, a¤ects the strategic decisions of the economic agents and economic outcomes.
Consider again the above modi…ed version of matching pennies. Something is very odd:
We changed the utility levels of player 1 (for strategy pro…le (a; a)), so we would expect to
see a change in the equilibrium strategy p of player 1. To the contrary, we found that it is
player 2 who changes his strategy q, from q = 1=2 to q = 1=3 whereas player 1 is employing
the same strategy p = 1=2 as in the orginal version. How can this be?
Consider the following learning dynamics (called “…ctitious play”). The players have
played the original version of “matching pennies”for a while, when the preferences of player 1
change as speci…ed in the modi…ed version. Player 1 still assumes that player 2 is randomizing
according to q = 1=2 and thus now chooses to play b for sure instead of randomizing. As
player 2 learns over time that player 1’s strategy has changed, he will switch himself from
randomizing to playing b for sure.
Fictitious play assumes that every player is always best-responding to the mixed strategy
implied by the historic distribution of her opponent’s actions. Thus, when player 2 has played
b long enough that player 1 infers that player 2 is mixing at q = 1=3 he will himself revert
to indi¤erence and mixing. While at this point in time any strategy is reasonable for player
1 only mixing according to p = 1=2 is stable in the sense that it maintains the incentives for
player 2 to keep mixing according to q = 1=3.
In a mixed equilibrium, the probability according to which a player is mixing between
his strategies is not determined by his own preferences (as he must be exactly indi¤erent
between the strategies) but by the condition that the randomization leaves the opponent
indi¤erent between her strategies. Thus whenever we change the …nal preferences of player
1 but keep those of player 2 …xed in a two person game, we should expect player 2’s mixed
strategy to change but player 1’s mixed strategy to stay the same. Formally, player 2’s
strategy must change to keep player 1 indi¤erent!