ODD

Answers to Odd-Numbered Problems, 4th Edition of Games and

Information, Rasmusen

PROBLEMS FOR CHAPTER 3: Mixed and Continuous

Strategies

22 November 2005. 14 September 2006. [email protected]. Http://www.rasmusen.org.

This appendix contains answers to the odd-numbered problems in the gourth

edition of Games and Information by Eric Rasmusen, which I am working on
now and perhaps will come out in 2006. The answers to the even- numbered
problems are available to instructors or self-studiers on request to me at
[email protected].

Other books which contain exercises with answers include Bierman &
Fernandez (1993), Binmore (1992), Fudenberg & Tirole (1991a), J. Hirsh-
leifer & Riley (1992), Moulin (1986), and Gintis (2000). I must ask pardon
of any authors from whom I have borrowed without attribution in the prob-
lems below; these are the descendants of problems that I wrote for teaching
without careful attention to my sources.

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 PROBLEMS FOR CHAPTER 3: Mixed and Continuous
Strategies

3.1. Presidential Primaries

Smith and Jones are fighting it out for the Democratic nomination for Pres-
ident of the United States. The more months they keep fighting, the more
money they spend, because a candidate must spend one million dollars a
month in order to stay in the race. If one of them drops out, the other one
wins the nomination, which is worth 11 million dollars. The discount rate
is r per month. To simplify the problem, you may assume that this battle
could go on forever if neither of them drops out. Let θ denote the probability
that an individual player will drop out each month in the mixed- strategy
equilibrium.

(a) In the mixed-strategy equilibrium, what is the probability θ each month

that Smith will drop out? What happens if r changes from 0.1 to 0.15?
Answer. The value of exiting is zero. The value of staying in is V =
V V
θ(10) + (1 − θ)(−1 + 1+r ). Thus, V − (1 − θ) 1+r = 10θ − 1 + θ, and
(11θ−1)(1+r)
V = (r+θ)
. As a result, θ = 1/11 in equilibrium.
The discount rate does not affect the equilibrium outcome, so a
change in r produces no observable effect.

(b) What are the two pure-strategy equilibria?

Answer. (Smith drops out, Jones stays in no matter what) and (Jones
drops out, Smith stays in no matter what).

(c) If the game only lasts one period, and the Republican wins the general
election if both Democrats refuse to give up (resulting in Democrat
payoffs of zero), what is the probability γ with which each Democrat
drops out in a symmetric equilibrium?
Answer. The payoff matrix is shown in Table A3.1.
Table A3.1: Fighting Democrats

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 Jones
Exit (γ) Stay (1 − γ)
Exit (γ) 0,0 0, 10
Smith
Stay (1 − γ) 10,0 -1,-1
The value of exiting is V (exit) = 0. The value of staying in is V (Stay) =
10γ + (−1)(1 − γ) = 11γ − 1. Hence, each player stays in with proba-
bility γ = 1/11 — the same as in the war of attrition of part (a).

3.3. Uniqueness in Matching Pennies

In the game Matching Pennies, Smith and Jones each show a penny with
either heads or tails up. If they choose the same side of the penny, Smith
gets both pennies; otherwise, Jones gets them.

(a) Draw the outcome matrix for Matching Pennies.

Table A3.2: “Matching Pennies”
Jones
Heads (θ) T ails (1 − θ)
Heads (γ) 1, −1 −1, 1
Smith:
T ails (1 − γ) −1, 1 1, −1
Payoffs to: (Smith, Jones).

(b) Show that there is no Nash equilibrium in pure strategies.

Answer. (Heads, Heads) is not Nash, because Jones would deviate to
T ails. Heads, Tails is not Nash, because Smith would deviate to T ails.
(Tails, Tails) is not Nash, because Jones would deviate to Heads.
(Tails, Heads) is not Nash, because Smith would deviate to Heads.

(c) Find the mixed-strategy equilibrium, denoting Smith’s probability of

Heads by γ and Jones’ by θ.
Answer. Equate the pure strategy payoffs. Then for Smith, π(Heads) =
π(T ails), and

θ(1) + (1 − θ)(−1) = θ(−1) + (1 − θ)(1), (1)

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 which tells us that 2θ−1 = −2θ+1, and θ = 0.5. For Jones, π(Heads) =
π(T ails), so

γ(−1) + (1 − γ)(1) = γ(1) + (1 − γ)(−1), (2)

which tells us that 1 − 2γ = 2γ − 1 and γ = 0.5.

(d) Prove that there is only one mixed-strategy equilibrium.

Answer. Suppose θ > 0.5. Then Smith will choose Heads as a pure
strategy. Suppose θ < 0.5. Then Smith will choose T ails as a pure
strategy. Similarly, if γ > 0.5, Jones will choose T ails as a pure strat-
egy, and if γ < 0.5, Jones will choose Heads as a pure strategy. This
leaves (0.5, 0.5) as the only possible mixed- strategy equilibrium.
Compare this with the multiple equilibria in problem 3.5. In that prob-
lem, there are three players, not two. Should that make a difference?

3.5. A Voting Paradox

Adam, Karl, and Vladimir are the only three voters in Podunk. Only Adam
owns property. There is a proposition on the ballot to tax property-holders
120 dollars and distribute the proceeds equally among all citizens who do not
own property. Each citizen dislikes having to go to the polling place and vote
(despite the short lines), and would pay 20 dollars to avoid voting. They all
must decide whether to vote before going to work. The proposition fails if
the vote is tied. Assume that in equilibrium Adam votes with probability
θ and Karl and Vladimir each vote with the same probability γ, but they
decide to vote independently of each other.

(a) What is the probability that the proposition will pass, as a function of
θ and γ?
Answer. The probability that Adam loses can be decomposed into three
probabilities— that all three vote, that Adam does not vote but one
other does, and that Adam does not vote but both others do. These
sum to θγ 2 + (1 − θ)2γ(1 − γ) + (1 − θ)γ 2 , which is, rearranged, γ 2 +
2γ(1 − γ)(1 − θ) or γ(2γθ − 2θ + 2 − γ).

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(b) What are the two possible equilibrium probabilities γ1 and γ2 with
which Karl might vote? Why, intuitively, are there two symmetric
equilibria?
Answer. The equilibrium is in mixed strategies, so each player must
have equal payoffs from his pure strategies. Let us start with Adam’s
payoffs. If he votes, he loses 20 immediately, and 120 more if both Karl
and Vladimir have voted.

πa (V ote) = −20 + γ 2 (−120). (3)

If Adam does not vote, then he loses 120 if either Karl or Vladimir
vote, or if both vote:

πa (N ot V ote) = (2γ(1 − γ) + γ 2 )(−120) (4)

Equating πa (V ote) and πa (N ot V ote) gives

0 = 20 − 240γ + 240γ 2 . (5)

The quadratic formula solves for γ:

√
12 ± 144 − 4 · 1 · 12
γ= . (6)
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This equations has two solutions, γ1 = 0.09 (rounded) and γ2 = 0.91(rounded).
Why are there two solutions? If Karl and Vladimir are sure not
to vote, Adam will not vote, because if he does not vote he will win,
0-0. If Karl and Vladimir are sure to vote, Adam will not vote, because
if he does not vote he will lose, 2-0, but if he does vote, he will lose
anyway, 2-1. Adam only wants to vote if Karl and Vladimir vote with
moderate probabilities. Thus, for him to be indifferent between voting
and not voting, it suffices either for γ to be low or to be high– it just
cannot be moderate.

(c) What is the probability θ that Adam will vote in each of the two sym-
metric equilibria?
Answer. Now use the payoffs for Karl, which depend on whether Adam
and Vladimir vote.

πc (V ote) = −20 + 60[γ + (1 − γ)(1 − θ)] (7)

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 πc (N ot V ote) = 60γ(1 − θ). (8)
Equating these and using γ ∗ = 0.09 gives θ = 0.70 (rounded). Equat-
ing these and using γ ∗ = 0.91 gives θ = 0.30 (rounded).

(d) What is the probability that the proposition will pass?

Answer. The probability that Adam will lose his property is, using
the equation in part (a) and the values already discovered, either 0.06
(rounded) (= (0.7)(0.09)2 +(0.3)(2(0.09)(0.91)+(0.09)2 )) or 0.94 (rounded
(= (0.3)(0.91)2 + (0.7)(2(0.91)(0.09) + (0.91)2 )).

3.7. Nash Equilibrium

Find the unique Nash equilibrium of the game in Table 9.

Table 9: A Meaningless Game

Column
Left M iddle Right

Up 1,0 10, −1 0, 1

Row: Sideways −1, 0 -2,-2 −12, 4

Down 0, 2 823,−1 2, 0

Payoffs to: (Row, Column).

Answer. The equilibrium is in mixed strategies. Denote Row’s probability of

U p by γ and Column’s probability of Lef t by θ. Strategies Sideways and
M iddle are strongly dominated strategies, so we can forget about them. Row
has no reason ever to choose Sideways, and Column has no reason ever to
choose M iddle.

In equilibrium, Row must be indifferent between U p and Down, so

πR (U p) = θ(1) + (1 − θ)(0) = πR (Down) = θ(0) + (1 − θ)(2)

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This yields θ∗ = 2/3. Column must be indifferent between Lef t and Right,
so

πR (Lef t) = γ(0) + (1 − γ)(2) = πR (Right) = γ(1) + (1 − γ)(0)

This yields γ ∗ = 2/3.

3.9 (hard). Cournot with Heterogeneous Costs

On a seminar visit, Professor Schaffer of Michigan told me that in a Cournot
model with a linear demand curve P = α − βQ and constant marginal cost
Ci for firm i, the equilibrium industry output Q depends on Σi Ci , but not
on the individual levels of Ci . I may have misremembered. Prove or disprove
this assertion. Would your conclusion be altered if we made some other
assumption on demand? Discuss.

Answer. A good approach when stymied is to start with a simple case. Here,
the two-firm problem is the obvious simple case. Prove the proposition for
the simple case, and then use that as a pattern to extend it. (Also, you can
disprove a general proposition using a simple counterexample, though you
cannot prove one using a simple example.)

Note that you cannot assume symmetry of strategies in this game. It is

plausible, though not always correct (remember Chicken), when players are
identical, but they are not here— firms have different costs. So we would
expect their equilibrium outputs to differ.

The proposition is true.

πj = (α − βΣi Qi − Cj )Qj ,

so
dπj
= α − βΣi6=j Qi − 2βQj − Cj = 0,
dQj
and
α − Cj − βΣi6=j Qi
Qj = .
2β
Industry output is
α − Cj − βΣi6=j Qi α − Cj Σi6=j Qi
Σj Qj = Σj = Σj − Σj .
2β 2β 2

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The first term of this last expression depends on the sum of the firms’ cost
parameters, but not on their individual levels. The second term adds up the
outputs of all but one firm N times, and so equals (N − 1) times the sum of
the output, (N − 1)Σj Qj . Thus,
 
α−C Σ Q
Σj Qj = Σj 2β j − (N − 1) i6=2j i

α−Cj
= Σj β(N +1) .

This does not depend on the cost parameters except through their sum.
Q.E.D.

A caveat: This proof implicitly assumed that every firm had low enough
costs that it would produce positive output. If it produces zero output, it is
at a corner solution, and the first order condition does not hold, so the proof
fails. Thus, the validity of the proposition depends on the following being
true for every j:
Cj − α − βΣi6=j Qi
Qj = > 0.
2β
This condition is not stated in terms of the primitive parameters (it depends
on Σi6=j Qi ), so to be quite proper I ought to solve it out further, but I will
not do that here.

The result does depend on linear demand. This can be shown by coun-
terexample. Suppose P = α − βQ2 . Then, attempting the construction
above,
πj = (α − β(Σi Qi )2 − Cj )Qj ,
so
dπj
= α − 3βQ2j − 2βΣi6=j Qi Qj − Cj = 0.
dQj
Solving this for Qj will involve taking a square root of Cj . But if Qj is a
function of the square root of Cj , then increasing Cj by a given amount and
decreasing Cl by the same amount will not keep the sum of Qj and Ql the
same, unlike before, where Qj was a linear function of Cj . So the propo-
sition fails for quadratic demand, and, more generally, whenever demand is
nonlinear.

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3.11. Finding Nash Equilibria
Find all of the Nash equilibria for the game of Table 10.

Table 10: A Takeover Game

Target
Hard M edium Sof t

Hard -3, -3 −1, 0 4, 0

Raider: Medium 0, 0 2,2 3, 1

Soft 0,0 2, 4 3, 3

Payoffs to: (Raider, Target).

Answer. The three equilibria are in pure strategies: (Hard, Soft), (Medium,
Medium), and (Soft, Medium).

There are two mixed strategy equilibria.

(1) ( Raider: Hard. Target: Mix between Medium and Soft.) Notice
that for Target, Hard is a dominated strategy. That means it will not be
part of any mixed strategy equilibrium. Next, notice that Soft is weakly
dominated. Thus, if Raider ever plays anything but Hard, Target will want
strongly to play Medium. What if Raider plays Hard? Then Target would
be willing to mix between Medium and Soft. If Target plays Medium with a
probability of γ, Raider’s payoff from Hard is (−1)γ + 4(1 − γ), whereas his
payoff from Medium or Soft is (2)γ + 3(1 − γ). Equating these yields γ ∗ =.
25. If γ is no bigger than .25, we have a Nash equilibrium.

(2) ( Raider: Mix between Medium and Soft. Target: Medium. ) How
about if Target plays Medium and Raider mixes? Raider would only want to
mix between Medium and Soft. But that would generate a Nash equilibrium,
for any mixing probability, since Raider gets 2 no matter what, and Target
prefers Medium no matter what the mixing probability may be.

3.13. The Kosovo War

Senator Robert Smith of New Hampshire said of the US policy in Serbia

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of bombing but promising not to use ground forces, “It’s like saying we’ll
pass on you but we won’t run the football.” ( Human Events, p. 1, April
16, 1999.) Explain what he meant, and why this is a strong criticism of
U.S. policy, using the concept of a mixed strategy equilibrium. (Foreign
students: in American football, a team can choose to throw the football (to
pass it) or to hold it and run with it to move towards the goal.) Construct
a numerical example to compare the U.S. expected payoff in (a) a mixed
strategy equilibrium in which it ends up not using ground forces, and (b) a
pure strategy equilibrium in which the U.S. has committed not to use ground
forces.

Answer. Senator Smith meant that by declaring our action, we have allowed
the Yugoslavs to choose a better response (for them) than if we left them
uncertain. Thus, the declaration reduces the expected U.S. payoff. Rather
than mixing– which means to be unpredictable– we chose a pure strategy.

Ane example can show this. Suppose that the US has the two alter-
natives of Air and Ground, and the Yugoslavs have the two alternatives of
Air Defense and Ground Defense. Air and Air Defense represent policies of
just positioning forces for an air war; Ground and Ground Defense represent
policies that also prepare for ground war.

Let the payoffs be as in Table A3.3.

Table A3.3: The Kosovo War

Yugoslavia
Air Defense (γ) Ground Defense
Air (θ) 0,0 1,-1
US
Ground 2,-5 -2,-2
Payoffs to: (U.S., Yugoslavia).

(a) In the mixed strategy equilibrium, Yugoslavia chooses its probability

of Air Defense to equate the US payoffs from Air and Ground. Thus,

πU S (Air) = γ(0) + (1 − γ)(1) = 2γ + (1 − γ)(−2) = πU S (Ground). (9)

This reduces to 1−γ = 2γ−2+2γ, so 3 = 5γ, and γ = 3/5. The U.S. expected
payoff from choosing Air is then πU S (Air) = γ(0) + (1 − γ)(1) = 1 − 3/5 = .4.

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 (b) If the U.S. instead moves first and chooses Air, Yugoslavia will re-
spond with Air Defense, and the U.S. expected payoff is 0.

Thus, by volunteering to move first, the U.S. reduces its payoff.

3.15. Coupon Competition

Two marketing executives are arguing. Smith says that reducing our use
of coupons will make us a less aggressive competitor, and that will hurt
our sales. Jones says that reducing our use of coupons will make us a less
aggressive competitor, but that will end up helping our sales.

Discuss, using the effect of reduced coupon use on your firm’s reaction
curve, under what circumstance each executive could be correct.

Answer. There are a couple of ways to look at this problem.

(1) One way is that the important strategy is coupon use directly. Smith
thinks that coupons are strategic substitutes, so when we reduce our use
of coupons, our rival will increase their use, and we will be hurt. Jones
thinks that coupons are strategic complements, so when we reduce our use
of coupons, our rival will reduce their use too, to the benefit of both of us.

(2) A second way is in terms of how coupon use affects how the two
companies play a game in the consumer market.

Smith thinks that our firm is in a market with downward sloping reac-
tion curves in the important strategy– strategic substitutes, as with Cournot
competition. If we use fewer coupons, that will shift in our reaction curve,
and we will end up with lower sales. We need to be “lean and hungry”,
because if we use coupons to make us softer in the product market, our rival
will react by being tougher.

The important strategy might be, for example, output, and if we use
more coupons, that will make us less willing to produce high output in reac-
tion to what our rival does, because each sale will be profitable. In the end,
we will contract our output and our rival will increase his.

Jones thinks that our firm is in a market with upward sloping reaction
curves in the important strategy– strategic complements, as with Bertrand
competition. If the important variable is price, and we use fewer coupons,

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that will shift out our reaction curve, and we will increase our price. So will
our rival, and we will both end up with higher profits.

We thus adopt a “fat cat” strategy– we use more coupons to make us

softer in the product market, and our rival becomes softer in response.

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