Lecture 3- Constant Sum games and the Prisoner’s Dilemma

Constant-sum games

This lecture will first study competitive games- these tend to be known as
“constant sum games” with “zero-sum games” as a special case.

Constant sum game- in each outcome the payoffs of the two players sum to a
constant amount. If one person has more than this amount then the other must
have an equivalent amount less.

LEFT RIGHT
UP 5, 1 8,-2
DOWN 3,3 2, 4

(NE is {UP, LEFT})

In this case we have an asymmetric constant sum game with payoffs summing
to 6.

The best known type of constant sum game is the zero- sum game which is
purely competitive.

A classic example of this is the “Matching pennies” game:

Heads Tails
Heads 1, -1 -1,1
Tails -1,1 1, -1
Each player has a penny and secretly turns it to heads or tails. If the pennies
match then Row player wins while if the pennies don’t match then Column
player wins.

This game is an asymmetric game with no Nash Equilibrium (although there is

one if one is allowed to mix the strategies).

Zero-sum games have a special place in the history of game theory since the
first games were formulated in this form.

Zero-sum games can be seen as models of extremely competitive situations

where the winner takes all e.g. football matches, bidding for franchises, general
elections, war ending in unconditional surrender etc. Also, most genuine
“games” are of this type.

However, it is of interest that most economic and social situations are NOT of
this type and are better modelled using other games.

Much of the empirical evidence for this game focusses on so-called “mixed
strategy equilibria” that go beyond the scope of this course. For this reason we
will not discuss this game much further.

Prisoner’s Dilemma

The most famous game in the literature. The PD is a symmetric game of partial
conflict with one Nash Equilibrium.
e.g.

Silent Confess
Silent 10,10 0,15
Confess 15,0 5,5

The Nash Equilibrium is {Confess, Confess}

The interesting part of the Prisoner’s Dilemma is the fact that the Nash
Equilibrium is not Pareto- optimal i.e. it doesn’t optimise overall welfare.

This is done by both sides staying silent.

However, this isn’t an equilibrium.

Hence, rationality recommends a set of strategies that undermines global

welfare.

The effects of this are profound- it undermines free-market ideology in the

sense that self-interest in this situation results in people being worse off.

The Game could be seen as a model of social allocation of resources.

There are multiple examples of prisoner dilemma situations:

i) Cournot vs Collusion Oligopoly

ii) Arms races

iii) Advertising competition in oligopoly.

iv) Cooperating to build a wall/ farm a field/ harvest crops etc.

The Prisoner’s Dilemma is a two person example of a much larger problem,
known as the problem of public goods. Public goods are goods where there is an
incentive not to produce the goods while benefitting from others producing the
goods.

e.g.s street lighting, public health, information (news).

Public goods situations generally involve > 2 players.

Question: HOW do people actually behave in a Prisoner’s dilemma?

Most of the evidence is experimental:

Rappaport & Chammah (1965)- 50% of strategy choices were cooperative i.e.
they would have chosen “silent”.

This holds even when looking at “one-shot” choices where an individual only
has one game to play.

Furthermore, variants of the Prisoner’s Dilemma have tended to show the same
result- large amounts of cooperation.

How can this behaviour be explained?:

i) Binmore (1993): The behaviour is misinterpreted. The payoffs in games are

supposed to be utilities, while those in experiments are money payoffs. In utility
terms, the players are simply playing a different game.

ii) Rabin (1993): Fairness/ reciprocal altruism. The reward one gets in a
particular outcome depends not just on the monetary payoff but also on that of
the other person.
Also depends on previous experience with other player. If other player has been
selfish then one is more likely to be selfish and vice versa.

Cooperation is a “fairness equilibrium”.

iii) Bounded rationality- use of Analogy & Framing. Rate of cooperation

depends on one’s overall knowledge of a situation and the analogies one makes
with other situations.

iv) When one cooperates depends on evolutionary mechanisms: survival may

depend on evolutionary “tactics”: kin selection, reciprocation and indirect
reciprocity.

(Doesn’t explain cooperation with out-group strangers)

Note that Altruistic Preferences can be formulated into a Prisoner’s dilemma as

well.