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Supermodular Games STANFORD
Supermodular Games STANFORD
Jonathan Levin
April 2006
Lemma 1 If f is twice continuously dierentiable, then then f has increasing dierences in (x, t) if and only if t0 t implies that fx (x, t0 ) fx (x, t)
for all x, or alternatively that fxt (x, t) 0 for all x, t.
A central question in monotone comparative statics is to identify when:
x(t) = arg max f (x, t)
xX
f (x, t) f (x, t)
by continuity. Thus, x x(t). It follows that x(t) must have a largest (and
by the same argument, smallest) element.
(ii) Fix t and t0 , and let x x(t) and x0 x(t0 ) to be two maximizers.
By the fact that x maximizes f (x, t),
f (x, t) f (min(x, x0 ), t) 0.
so by supermodularity
f (max(x, x0 ), t0 ) f (x0 , t0 ) 0.
Supermodular Games
Then
(i) BRi (si ) has a greatest and least element BRi (si ), BRi (si ).
(ii) If s0i si , then BRi (s0i ) BRi (si ) and BRi (s0i ) BRi (si ).
2.1
Examples
1. (Investment Game) Suppose firms 1, ..., I simultaneously make investments si {0, 1} and payos are:
( P
I
sj k if si = 1
j=1
ui (si , si ) =
0
if si = 0
where is increasing in aggregate investment.
2. (Bertrand Competition) Suppose firms 1, ..., I simultaneously choose
prices, and that
X
dij pj
Di (pi , pi ) = ai bi pi +
j6=i
+
where
2bi , dij 0. Then Si = R and (pi , pi ) = (pi ci )Di (pi , pi )
has i /(pi pj ) = dij 0. So the game is supermodular.
Firm 1s quantity
2.2
Consider the Bertrand game from above, where firms 1 and 2 choose prices
p1 , p2 . Suppose they have zero marginal costs, and that Di (pi , pj ) = 12pi +
pj . Then
i (pi , pj ) = pi [1 2pi + pj ] .
Note that
i
(pi , pj ) = 1 4pi + pj
pi
i
pi
1
4
is strictly
If pi > 12 , then
dominated.
i
pi
1
2
is strictly
[ 14 , 12 ].
1
1
sk2
1
1
1
1 sk1
s0
+
= +
+
= ... = +
+ ... + k + k
4
4
4 16
16
4 16
4
4
4
sk =
sk2
sk
1
1
1
1
1
1 sk1
+
= +
+
= ... = +
+ ... + k + k
4
4
4 16
16
4 16
4
4
So
1
lim sk = lim sk = .
k
3
Main Result
We now use the properties of supermodular games to show that the correspondence between rationalizable and Nash strategies in the Bertrand example is significantly more general than might appear at first glance.
Theorem 2 Let (S, u) be a supermodular game. Then the set of strategies
surviving iterated strict dominance has greatest and least elements s, s and
s, s are both Nash equilibria.
Corollary 2 This implies the following.
1. Pure strategy NE exist in supermodular games
2. The largest and smallest strategies compatible with ISD, rationalizability, correlated equilibrium and Nash equilibrium are the same.
3. If a supermodular game has a unique NE, then it is dominance solvable
(& lots of learning or adjustment rules will converge to it (e.g. bestresponse dynamics)).
Proof. As in the example, we iterate the best response mapping. Let S 0 =
S, and let s0 = (s01 , ..., s0I ) be the largest element of S. Let s1i = BRi (s0i ),
/ Si1 , i.e. si > s1i , then it is dominated
and Si1 = {si Si0 : si s1i }. If si
0 because (by increasing dierences and the fact that s0
by s1i when si Si
i
is the biggest maximizer)
ui (si , si ) ui (s1i , si ) ui (si , s0i ) ui (s1i , s0i ) < 0
Note that s1i = BRi (s0i ) and s1i s0i .
Iterating this argument, define
= BRi (ski )
sk+1
i
and
n
o
Sik+1 = si Si : si sk+1
i
5
k
Now, if sk sk1 , this implies that sk+1
= BRi (ski ) BRi (sk1
i
i ) = si . So
k
by induction, si is a decreasing sequence for each i. Define:
si = lim ski
k
B
2, 1
0, 0
F
0, 0
1, 2
Recall that Battle of the Sexes has two pure nash equilibria (B, B) and (F, F )
and a mixed equilibrium ( 23 B + 13 F, 13 B + 23 F ). To make this a supermodular
game, we need to define an order on the strategy sets. Let F >i B for both
players. Then ui (si , si ) has increasing dierences in (si , si ).
In the mixed equilibrium it is crucial that player 1 believes that player
2 is playing exactly 13 B + 23 F . If player 1 believes player 2 will play F with
probability 2/3 + , even for > 0 small, then player 1 will strictly prefer
F . Similarly, if player 2 believes 1 will play F with any probability above
1/3, player 2 will strictly prefer F .
Now, imagine the players play repeatedly, with player 1 initially believing
2 will play F with probability 2/3 + and player 2 initially believing 1 will
7
play F with probability 1/3 + . Both will play F . If they then adjust
their beliefs so they put more weight on their opponents playing F (Im
purposely being a little loose about the dynamic adjustment process here),
they will play F again in the next period, and so on until they always play
F and have moved away from mixed strategy beliefs.
This situation is not contrived. The more general point is that so long
as player i adjusts his beliefs toward j playing F when j does play F , and so
long as is response to this change is to herself play F more often, then any
move toward (F, F ) (or toward (B, B)) and away from the mixed equilibrium
is self-reinforcing, and many reasonable dynamic processes will move away
from the mixed equilibrium toward a pure equilibrium.2
Comments
1. (Extensions) These results extend to games where players have multidimensional strategy spaces. If Si Rn , we need two further assumptions. First, for all i, Si must be a complete sublattice; second, for all i,
ui must be supermodular in si as well as having increasing dierences
in (si , si ). For precise definitions, see that Monotone Comparative
Statics handout. The results also extend to the case where ui satisfies the single crossing property in (si , si ) as opposed to the stronger
assumption of increasing dierences (see Milgrom and Shannon, 1994).
2. (Comparing Fixed Points) Milgrom and Roberts (1994) use similar
arguments to derive comparative statics for models where equilibria
are the solutions to some equation f (x, t) = 0. Roughly, they show
that if f is increasing in t and continuous (in a weak sense) in x, then
the largest fixed point of f (x, t) = 0 is increasing in t. Thus their
results provide analogues of Proposition 1 for another class of models.
References
[1] Bulow, J., J. Geanakoplos and P. Klemperer (1985) Multimarket
Oligopoly: Strategic Substitutes and Complements, J. Pol. Econ., 93,
488511.
2
Because our comparative statics results refer to the highest and lowest equilibria,
you might also ask what we should make of interior equilibria. Echenique (2002) uses a
related stability idea to argue that under reasonable dynamic adjustment processes, our
comparative statics predictions should carry through even if players dont always end up
at the lowest (or highest) equilibrium.
[2] Diamond, P. (1982) Aggregate Demand Management in Search Equilibrium, J. Pol. Econ.
[3] Echenique, F. (2002) Comparative Statics by Adaptive Dynamics and
the Correspondence Principle, Econometrica, 70(2).
[4] Echenique, F. and A. Edlin (2003) Mixed Strategy Equilibria in Games
of Strategic Complements are Unstable, Caltech Working Paper.
[5] Milgrom, P. and J. Roberts (1990) Rationalizability and Learning in
Games with Strategic Complementarities, Econometrica, 58, 1255
1278.
[6] Milgrom, P. and J. Roberts (1994) Comparing Equilibria, American
Economic Review.
[7] Milgrom, P. and C. Shannon (1994) Monotone Comparative Statics,
Econometrica.
[8] Topkis, D. (1968) Ordered Optimal Decisions. Ph.D. Dissertation, Stanford University.
[9] Topkis, D. (1979) Equilibrium Points in Non-Zero Sum n-Person Submodular Games, SIAM J. of Control and Optimization, 17(6), 773
787.
[10] Topkis, D. (1998) Supermodularity and Complementarity, Princeton
University Press.
[11] Vives, X. (1990) Nash Equilibrium with Strategic Complementarities,
J. Math. Econ, 19, 305321.