ECON 673 2024 Spring Lecture 3

Practice with Games of Complete Information
ECON 673
Information, Game Theory, and Market Design
Lecture 3
David A. Ovadia
University of Maryland
8 February 2024
David A. Ovadia ECON 673 – Lecture 3 1 / 27

Recording of lectures
Please note that this lecture is being recorded (audio and video)
By joining today’s class session, you consent to being recorded

Warming up for auctions
Let’s start the night with a fun game!
I’m auctioning off a $20 bill (for realz!)
Call out your bids as if you were at an auction house
The winner of the $20 bill is the highest bidder
This is a “Top-2-Pay” auction:

the two highest bidders pay their final bids
Let’s start the bidding!

Previous lecture
Review
Solution concepts
Application: duopoly competition
Discussion
Collusion
Mixed strategies
Expected utility
Equilibria in mixed strategies

Previous podcast
Mixed Strategies
Practice
Key concepts

Pulse check
What questions do you have about the mixed strategies podcast?
Any other questions about mixed strategies?
How was the problem set? Any questions?
Any other questions or concerns?

Lecture outline
Practice with games of complete information

Cooperation versus competition
Playtime
Mixed strategies
Auctions
The Vickrey auction
The English auction

Lecture objectives
By the end of this lecture, you should be able to

Describe the basic structure of a typical auction
Simplify the analysis of a dynamic auction
by approximating it with a comparable static auction
Compare and contrast the rules and equilibria
of different auction formats

Cooperation versus Competition
Practice with Games of Complete Information Playtime
Mixed Strategies
Section 1

Mixed Strategies
The tragedy of the commons
Suppose there is a pasture between the houses of two goat farmers
Both farmers are allowed to let their goats graze in the pasture
Each farmer must decide how many goats to buy

at the start of the season
By grazing, each goat grows bigger and becomes more valuable

to its owner
The more goats there are in the pasture, the less food each will get

Mixed Strategies
Game formalities
Each farmer has three choices to choose from: 1, 2, or 3 goats
(denote Farmer 1’s choice as g1 and Farmer 2’s choice as g2 )
The (constant marginal) cost, c, of obtaining a goat

at the begining of the season is $10
The end-of-season value of each goat, v (g1 , g2 ), is as follows:





 90,
g1 + g2 =1
80,
g1 + g2 =2






70,

g1 + g2 =3
v (g1 , g2 ) =
60, g1 + g2 =4


50, g1 + g2 =5






40, g1 + g2 =6



Mixed Strategies
Payoffs and examples
The payoffs are as follows:

u1 (g1 , g2 ) = g1 v (g1 , g2 ) − c

u2 (g1 , g2 ) = g2 v (g1 , g2 ) − c

Example 1: If g1 = 1 and g2 = 2, then

u1 (1, 2) = 1(70 − 10) = 60
u2 (1, 2) = 2(70 − 10) = 120
Example 2: If g1 = 3 and g2 = 1, then

u1 (1, 2) = 3(60 − 10) = 150
u2 (1, 2) = 1(60 − 10) = 50

Mixed Strategies
Normal form diagram
We can represent this game in normal form as follows:
Player 2
1 2 3
1 70, 70 60, 120 50, 150

Player 1
2 120, 60 100, 100 80, 120
3 150, 50 120, 80 90, 90

Mixed Strategies
No table talk
Let’s see what types of outcomes occur

when players cannot communicate
I will pair you up and designate who is player 1 and who is player 2
Play the games as follows:

Silently study Game 1
and decide on a strategy
When both of you are ready,
simultaneously reveal your chosen strategies
Circle the realized outcome on the handout
Repeat this process for the other three games

Mixed Strategies
Game 1 (tragedy of the commons)
Player 2
1 2 3
1 70, 70 60, 120 50, 150

Player 1
2 120, 60 100, 100 80, 120
3 150, 50 120, 80 90, 90

Mixed Strategies
Game 2
Player 2
W X Y Z
A 0, 0 100, 100 0, 0 0, 0
B 0, 0 0, 0 0, 0 99, 99
Player 1
C 100, 100 0, 0 0, 0 0, 0
D 0, 0 0, 0 100, 100 0, 0

Mixed Strategies
Game 3
Player 2
L R
T −1, −1 1, 1
Player 1
B 1, 1 −1, −1

Mixed Strategies
Game 4
Player 2
W X Y Z
A 8, 6 5, 4 4, 3 7, −10
Player 1
B 20, −5 2, −10 6, 3 3, 15

Mixed Strategies
Table talk allowed

Now, let’s see what happens when players can communicate
First, I will rotate your pairings
For each pair, whoever was previously player 1

now becomes player 2 and vice-versa
Play the games as follows:

Take 30 seconds to openly discuss Game 1 and your strategies
Take 15 seconds to silently choose a strategy
When both of you are ready,
simultaneously reveal your chosen strategies
Circle the realized outcome on the handout
Repeat this process for the other three games
Mixed Strategies
The return of Golden Balls
Here’s a fun example of pre-play communication: Golden Balls

Mixed Strategies
IESDS and mixed strategies

Consider the game from problem 5 of Problem Set 1:
Player 2
L C R
T 2, 4 0, 2 4, 1
Player 1
M 3, 0 3, 1 2, 3
B 1, 3 1, 2 3, 0
For IESDS, try these steps

1 Try IESDS just in pure strategies
2 If stuck, identify pure strategy candidates that might be
eliminable when considering mixed strategies

3 Try eliminating these candidates through mixed strategies

Mixed Strategies
IESDS and mixed strategies (continued)
T cannot possibly be dominated by any mixture of M and B

(Why?)
The same can be said about M
B is a reasonable candidate for elimination (Why?)
When in doubt, try a 50/50 mixture:

2 T + 2 M weakly dominates B, so we need to tweak our guess
1 1
just a little bit to get strict dominance

Mixed Strategies
Be careful when considering never-best responses
In the previous example, you might be tempted to eliminate B

for a different reason: B is a never-best response
(there is no strategy of Player 2’s to which B is a best response)
It’s very straightforward to argue that a strictly dominated strategy

is a never-best response
It can also be proven (beyond the scope of this class)

that the converse is true, but only for 2-player games
We don’t have the tools to do a deeper dive on this topic,

so here’s my advice
Do not use this concept formally
Do think about this concept intuitively

Mixed Strategies
Some additional thoughts on mixed strategies
Let’s discuss a few points relating to mixed strategies

Necessity in zero-sum games
Knife-edge instability of mixed-strategy equilibria
Mixed-strategy equilibria are often Pareto inferior
to pure-strategy equilibria
How we model mixed strategy equilibria
versus actual behavioral outcomes
How to reconcile mixed-strategy equilibria
with the “no regrets” interpretation of Nash equilibria

Mixed Strategies
Key lessons
Game theory is a practical and powerful tool

for illustrating externalities
Auctions are useful mechanisms for eliciting private information

from players
We’re going to have to adapt our approach to best responses

to account for type/payoff uncertainty

Mixed Strategies
Post-lecture feedback
Please remember to submit your anonymous post-lecture feedback:
Muddiest point
Eureka moment
General comments, suggestions, or concerns (or “N/A”)

Mixed Strategies
On your own
Podcasts:
Probability theory review
(Note: you do not need to come up with questions
for this podcast since there’s no new material here)
Practice problem: linear voting
Suggested Readings:
In Game Theory: An Introduction:
Section 13.1.1
Section 13.1.2
In Game Theory for Applied Economists:
No suggested readings from this text
(additional readings will come next week)

ECON 673 2024 Spring Lecture 3

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Practice with Games of Complete Information

David A. Ovadia ECON 673 – Lecture 3 1 / 27

By joining today’s class session, you consent to being recorded

David A. Ovadia ECON 673 – Lecture 3 2 / 27

Warming up for auctions

Let’s start the night with a fun game!

I’m auctioning off a $20 bill (for realz!)

Call out your bids as if you were at an auction house

The winner of the $20 bill is the highest bidder

This is a “Top-2-Pay” auction:

Let’s start the bidding!

David A. Ovadia ECON 673 – Lecture 3 3 / 27

David A. Ovadia ECON 673 – Lecture 3 4 / 27

David A. Ovadia ECON 673 – Lecture 3 5 / 27

What questions do you have about the mixed strategies podcast?

Any other questions about mixed strategies?

How was the problem set? Any questions?

Any other questions or concerns?

David A. Ovadia ECON 673 – Lecture 3 6 / 27

Practice with games of complete information

David A. Ovadia ECON 673 – Lecture 3 7 / 27

By the end of this lecture, you should be able to

David A. Ovadia ECON 673 – Lecture 3 8 / 27

Practice with Games of Complete Information

David A. Ovadia ECON 673 – Lecture 3 9 / 27

The tragedy of the commons

Suppose there is a pasture between the houses of two goat farmers

Each farmer must decide how many goats to buy

By grazing, each goat grows bigger and becomes more valuable

David A. Ovadia ECON 673 – Lecture 3 10 / 27

The (constant marginal) cost, c, of obtaining a goat

The end-of-season value of each goat, v (g1 , g2 ), is as follows:

David A. Ovadia ECON 673 – Lecture 3 11 / 27

Payoffs and examples

The payoffs are as follows:

Example 1: If g1 = 1 and g2 = 2, then

Example 2: If g1 = 3 and g2 = 1, then

David A. Ovadia ECON 673 – Lecture 3 12 / 27

Normal form diagram

We can represent this game in normal form as follows:

1 70, 70 60, 120 50, 150

2 120, 60 100, 100 80, 120

3 150, 50 120, 80 90, 90

David A. Ovadia ECON 673 – Lecture 3 13 / 27

Let’s see what types of outcomes occur

Play the games as follows:

David A. Ovadia ECON 673 – Lecture 3 14 / 27

Game 1 (tragedy of the commons)

1 70, 70 60, 120 50, 150

2 120, 60 100, 100 80, 120

3 150, 50 120, 80 90, 90

David A. Ovadia ECON 673 – Lecture 3 15 / 27

David A. Ovadia ECON 673 – Lecture 3 16 / 27

David A. Ovadia ECON 673 – Lecture 3 17 / 27

David A. Ovadia ECON 673 – Lecture 3 18 / 27

Table talk allowed

First, I will rotate your pairings

For each pair, whoever was previously player 1

Play the games as follows:

The return of Golden Balls

Here’s a fun example of pre-play communication: Golden Balls

David A. Ovadia ECON 673 – Lecture 3 20 / 27

IESDS and mixed strategies