Practice 2: Best Response, Nash Equilibrium, and

Dominant Strategy Equilibrium. Iterated Elimination

of Dominated Strategies
Vera Sharunova
February 2-4, 2021

1 Two Classifications of Games

There are two main classification of games: (i) according to the order of play – simulta-
neous and sequential; and (ii) according to the completeness of information in the game:
games with complete and incomplete information. In simultaneous games, strategies
are chosen at the same time (or there is no possibility of communication between the
players). In sequential games, strategies are chosen according to some well-defined
order. If players have full and equal knowledge of the elements of the game, such a game
is said to have complete information, and otherwise – incomplete information.
When we get to games of incomplete information, we will consider games where the
payoffs may be unknown.

Q: Match the following games to the types in the table:

A. Grade game
B. Grade game with unknown payoffs of opponent
C. The game of chess
D. Open outcry auction

Information
Complete Incomplete
Simultaneous Grade game Grade game (unknown payoffs)
Moves
Sequential Chess Open outcry auction

Different types of games call for different methods in order to predict their outcomes. We
have already covered Nash equilibrium, which is a suitable solution concept for simul-
taneous games of complete information. Later in the semester we will introduce more
complicated equilibrium concepts. Statistics in general, and Bayes’ rule in particular,
will come in handy when we talk about games of incomplete information, where players

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ECON3308.01: Game Theory in Economics Spring 2021

would need to come up with beliefs about their opponents’ behavior since they could
have limited information about their payoffs.

2 Recap: Best Response and Iterated Elimination

of Strictly Dominated Strategies

Player 2
L M R
T 3, 1 2, 3| 10, 2
H 4, 5| 3, 0 6, 4
Player 1
K 2, 2 5, 4 +
12, 3−
B 5, 6− 4, 5 8, 7|

Recap questions:

• Are there any strictly or weakly dominated strategies in the original game?
In the original game, strategy H is strictly dominated by strategy B for Player 1.
There are no dominant or dominated strategies for Player 2 in the original game.

• Is this game dominance-solvable? This game is dominance-solvable. The order of

elimination is H – L – T, B – R. This leaves us with (K, M) as the Nash equilibrium.

• Define a Nash equilibrium. Find Nash equilibria of the game using the best re-
sponse analysis. A strategy profile (s∗i , s∗−i ) is a Nash equilibrium if and only if the
strategies are best responses to each other. See the best responses for both players
in the normal form above.

• Are the Nash equilibria also dominant-strategy Nash equilibria? The Nash equilib-
rium (K, M) is not a DSNE because neither K nor M are dominant strategies for
the respective players.

• What is the outcome of this game? Does it maximize the sum of payoffs for both
players? The outcome of the game is (5, 4). It does not maximize the sum of
payoffs because playing (K, R) or (B, R) would achieve a higher total payoff.

• Why is it impossible for the two players to coordinate on a better outcome like (B,
R)? First of all, we assume that the two players cannot communicate or do not
trust each other to follow through on unwritten agreements. If we start out in cell
(B, R), Player 1 would want to deviate to cell (K, R) since strategy K is the best
response to strategy R. Once we move to cell (K, R), Player 2 wants to deviate
to cell (K, M) since strategy M is the best response to strategy K. Therefore, we
converge back to the Nash equilibrium. This illustrates another property of Nash
equilibria – there should be no profitable unilateral deviations.

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ECON3308.01: Game Theory in Economics Spring 2021

Practice Question

Player 2
V W X Y Z
A -1, 8| 2, 3 4, 0 -2, 3 0, 7
B 1, 1− 3, 8+ 5, -3− 1, -2− 2, 2
Player 1 C 1, 0− 3, 4+ -2, 4| -1, 2 0, 2
D 0, -2 1, 3| 0, 2 0, 1 1, -1
E 0, 3 2, 2 -1, -3 -4, 5 5, 6+

1. Find strictly and weakly dominated strategies for both players. B strictly dominates
A and D and weakly dominates C for Player 1. There are no strictly dominated
strategies for Player 2, but strategy X is weakly dominated by strategy W.

2. Is the game below dominance-solvable? Find the order of iterated elimination of

strictly dominated strategies. We can eliminate strategies A and D because they are
strictly dominated by strategy B for Player 1. Next, strategy V becomes strictly
dominated by strategy Z for Player 2. No further reductions can be made, so the
game is not dominance-solvable. Order of elimination: A, D – V.

3. What would happen if you were to iteratively delete both strictly and weakly domi-
nated strategies? In this case, we can remove A, D, and C at the first iteration for
Player 1. After that, strategy Z strictly dominates V, X, and Y for Player 2. This
process leaves us with two Nash equilibria of (B, W) and (E, Z).
Order of elimination: A, D, C – V, X, Y.

4. Finally, find all the Nash equilibria using the best response analysis. See the anal-
ysis above. There are three Nash equilibria (B, W), (C, W), and (E, Z).

5. Go back to the IEDS-reduced game in point 3. Find all the Nash equilibria in this
game using the best response analysis. The analysis is the same as in point 4.
There are three Nash equilibria (B, W), (C, W), and (E, Z).

6. What can you conclude from comparing your findings in 5 and 6? The conclusion
is: We can safely eliminate strictly dominated strategies without concern about
the order of elimination. However, this is not true for weakly dominated strategies.

NB: Elimination of weakly dominated strategies may result in loss of some

of Nash equilibria!

You may be wondering why we are using IEDS if (i) sometimes we cannot even arrive at a
solution this way; and (ii) it is not immune to loss of Nash equilibria. We use it precisely
because it works sometimes (if we are eliminating only strictly dominated strategies)
and sometimes it is the easiest and most elegant way of finding Nash equilibria.