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Chap 1: Normal Form Games: Step 1: Each Player Simultaneously and Independently Chooses An Action
Chap 1: Normal Form Games: Step 1: Each Player Simultaneously and Independently Chooses An Action
Step 2: Conditional on the players’ choices of actions, payoffs are distributed to each player.
Once the players have all made their choices, these choices will result in a particular outcome,
or probabilistic distribution over outcomes. The players have preferences over the outcomes of
the game given by some payoff function over outcomes.
For example, if we are playing rock-paper-scissors and I draw paper while you simultaneously
draw scissors, then the outcome is that you win and I lose, and the payoffs are $0.10 for
example.
Note : what exactly common knowledge means is by no means common knowledge. To make it clear,
Definition 1 An event E is common knowledge if (1) everyone knows E, (2) everyone knows that
everyone knows E, and so on ad infinitum.
Requiring common knowledge : I want to predict how you will make your choice, given my belief that
you understand the game. Your understanding incorporates your belief about my understanding, and so
on.
Definition 2 A Static Game of Complete Information is a static game in which the way players’ actions
affect each player’s payoff is common knowledge to the players of the game.
Definition 3 A pure strategy for player i is a deterministic plan of action. The set of all pure strategies
for player i is denoted Si. A profile of pure strategies s = (s1, s2,. . ., sn), si ∈ Si for all i = 1, 2,. . ., n,
describes a particular combination of pure strategies chosen by all n players in the game.
=
Note 1: Attention is restricted to the case in which players choose deterministic actions: “pure”
strategies: An alternative to choosing one of your pure strategies would be for you to choose actions
stochastically → Chap 6 of TADELIS
Note 2: The concept of strategy is useful for games in which there will be relevance to conditioning
one’s actions on events that unfold over time, → Chapter 7 of TADELIS. In static games players
choose actions once and for all and simultaneously, so strategies are actions
3. A set of payoff functions, {v1, v 2 , . . . , vn}, each assigning a payoff value to each combination of
chosen strategies, that is, a set of functions vi : S1 × S2 ×. . . × Sn → R for each i ∈ N .
v1(M, M) = v2(M, M) = −2
v1(F, F) = v2(F, F) = −4
v1(M, F) = v2(F, M) = −5
v1(F, M) = v2(M, F) = −1.
Example: Cournot Duopoly
A variant of this example was first introduced by Augustin Cournot (1838).
Two identical firms, players 1 and 2, produce some good.
Assume that there are no fixed costs of production, and let the variable cost to each firm i of producing
quantityqi ≥ 0 be given by the cost function, ci(qi) = qi2 for i = 1, 2
The actions are choices of quantity, and the payoffs are the profits. Hence the following represents the
normal form:
We are implicitly assuming that prices cannot fall below zero, so that if the firms together produce a
quantity that is greater than 100, the price will be zero and each firm’s payoffs are its costs.
Columns Each column represents one of player 2’s strategies. If there are m strategies in S2
then the matrix will have m columns.
Matrix entries Each entry in this matrix contains a two-element vector (v1, v2), where vi is
player i’s payoff when the actions of both players correspond to the row and column of that
entry.
Note, however, that neither the Cournot duopoly nor the voting example (in book) can be represented by
a matrix. The Cournot duopoly is not a finite game (there are an infinite number of actions for each
player), and the voting game has more than two players.
Example: The Prisoner’s Dilemma
Example: Rock-Paper-Scissors
Example : the Battle of the Sexes, introduced by R. Duncan Luce and Howard Raiffa (1957). The game
is summarized in the following matrix:
We need to make assumptions on behavior and on beliefs of the players → in search of a solution
concept, that will result in predictions or prescriptions.
files that emerge as one of the solution concept’s
An equilibrium is any one of the strategy pro
predictions.
1. Players are “rational”: A rational player is one who chooses his action, si ∈ Si , to maximize
his
∈ payoff consistent with his beliefs about what is going on in the game.
2. Players are “intelligent”: An intelligent player knows everything about the game: the actions,
the outcomes, and the preferences of all the players.
3. Common knowledge: The fact that players are rational and intelligent is common knowledge
among the players of the game.
4. Self-enforcement: Any prediction (or equilibrium) of a solution concept must be self-
enforcing. No third party that can enforce any profile of actions that the players will not
voluntarily agree to stick to. The requirement is at the heart of noncooperative game theory.
Evaluating Outcomes
Economists use a particular criterion for evaluating whether an outcome is socially undesirable. An
outcome is considered to be socially undesirable if there is a different outcome that would make some
people better off without harming anyone else.
→ criterion of Pareto optimality, which is in tune with the idea of efficiency or “no waste.”
That is, we would like all the possible value deriving from a given interaction to be distributed
among the players.
For example, in the Prisoner’s Dilemma we made the case that (F, F) should be considered as a very
likely outcome. Note it is Pareto dominated by (M, M). (Notice that (M, M) is not the only Pareto-
optimal outcome. (M, F) and (F, M) are also Pareto-optimal outcomes because no other profile
dominates any of them. Don’t confuse Pareto optimality with the best “symmetric” outcome that leaves
all players “equally” happy.)