Course Games Theory INSEA 2012-2013

Introduction
Simultaneous Games with complete - imperfect information

Dynamic (Extensive form) games with perfect information
Dynamic (Sequential) games with complete and imperfect information
Nash Implementation
Nash Implementation under Domain Restrictions with Indierences
Games Theory Applied
to Economics and Political Sciences
Ahmed Doghmi
National Institute of Statistics and Applied Economics,
Madinat Al Irfane, Rabat Institutes, 10100 Rabat, Morocco
,
Max Planck Institute of Economics, Strategic Interaction Group,
Kahlaische Strae 10, D-07745, Jena, Germany
and
HEC - Rabat, Centre de Rabat 67, rue Jaafar Essadik
Agdal 10080 Rabat, Morocco
Ahmed Doghmi Games Theory Applied to Economics and Political Sciences
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Introduction and Denitions
Game theory is a mathematical approach that is applied to
several areas:
1
in economics and business;
2
in biology (particularly evolutionary biology and ecology);
3
engineering;
4
political science;
5
international relations;
6
computer science;
7
philosophy.
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Game theory is a mathematical approach that is applied to
several areas:
1
in economics and business;
2
in biology (particularly evolutionary biology and ecology);
3
engineering;
4
political science;
5
international relations;
6
computer science;
7
philosophy.
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It is considered as new discipline since the publication of the
book Theory of Games and Economic Behavior by J. V.
Neumann and Morgenstern (1944);
The goal of games theory is to model the behavior of agents
(or players) by studying their strategic interactions;
A player can be a individual, a rm, a political party...
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Branches of games theory: We distinguish two branches of
games:
1
Cooperative games: cooperative games theory describes only
the outcomes (without detail) that result when the players
come together in dierent combinations;
2
Non-cooperative games: a game is a detailed model of all the
moves available to the players.
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games:
1
2
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games:
1
2
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Now, we are going to look at the non-cooperative branch.
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A non-cooperative game is a situation where the consequences
of actions (or strategies) of each depend on those other;
To predict the outcome of a game, several concept solution
may be considered depending on the type of studied games;
For example, for simultaneous (static) games:
1
Where the information is complete, the concept of solution is
represented by the notion of Nash equilibrium: it is to nd a
list (or prole) of individual strategies such that no agent has
incentive to unilaterally deviate from its strategy, if all others
do not change theirs;
2
In the case of incomplete information, games are generally
resolved by the notion of Bayesian equilibrium.
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1
2
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1
2
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1
2
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1
2
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Types of games: We distinguish two types of games:
1
Simultaneous games: the players take their strategies
simultaneously, ie, a player chooses his strategy without
knowing the other and vice versa.
2
Dynamic games: the players involved one after the other.
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1
2
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1
2
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1
2
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Information:
1
Complete but imperfect information: the players know all
relevant parameters of games as strategies prole S
i
and payo
functions, but the players do not know what others will choose;
2
Perfect information: For dynamic games where players have
seen what others do;
3
Incomplete information: there is private information.
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Information:
1
i
and payo
2
3
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Information:
1
i
and payo
2
3
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Example: prisoners dilemma game
Iterative elimination of strictly dominated strategies
Nash Equilibrium
Nash Equilibrium and Pareto Optimality
Mixed Nash Equilibrium
Plan
1
Introduction
2
Nash Equilibrium
3
The concept of subgames
Economic application: Stackelberg Model (1934)
4
Dynamic (Sequential) games with complete and imperfect
information
5
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Introduction
Maskins theorems (1977,1999)
Applications to political sciences: voting rules
Borda rule
Plurality rule
Anti-plurality rule
Danilovs - Yamatos theorems
6
Nash Implementation under Domain Restrictions with
Indierences
Nash implementation in exchange economies with
single-plateaued preferences
New sucient Conditions
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Nash Equilibrium
Example: Prisoner Dilemma
Assume that two accomplices i and j of a crime are
interviewed separately;
They have the choice between the strategy of confession and
that the accusation;
If i admits accusing j and j does not confess, i is released and
j is punishable by 10 years in prison;
If both confess, they each have a term of 6 years prison;
If neither confesses, they will each have one year in prison.
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Nash Equilibrium
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Prisoner j
Prisoner i
Confess (C) Not Confess (NC)
Confess (C) (-6,-6) (0,-10)
Not Confess (NC) (-10,0) (-1,-1)
1
Players: prisoner i and prisoner j ;
2
Strategies: {C, NC};
3
Payos: let u
i
(., .) denote the utility function of a player i .
- For prisoner i : u
i
(C, C) = 6; u
i
(C, NC) = 0;
u
i
(NC, C) = 10; u
i
(NC, NC) = 1;
- For prisoner j : u
j
(C, C) = 6; u
i
(C, NC) = 0;
u
i
(NC, C) = 10; u
i
(NC, NC) = 1
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Nash Equilibrium
Prisoner j
Prisoner i
Confess (C) (-6,-6) (0,-10)
Not Confess (NC) (-10,0) (-1,-1)
1
2
3
Payos: let u
i
i
(C, C) = 6; u
i
(C, NC) = 0;
u
i
(NC, C) = 10; u
i
(NC, NC) = 1;
j
(C, C) = 6; u
i
(C, NC) = 0;
u
i
(NC, C) = 10; u
i
(NC, NC) = 1
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Nash Equilibrium
Prisoner j
Prisoner i
Confess (C) (-6,-6) (0,-10)
Not Confess (NC) (-10,0) (-1,-1)
1
2
3
Payos: let u
i
i
(C, C) = 6; u
i
(C, NC) = 0;
u
i
(NC, C) = 10; u
i
(NC, NC) = 1;
j
(C, C) = 6; u
i
(C, NC) = 0;
u
i
(NC, C) = 10; u
i
(NC, NC) = 1
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Nash Equilibrium
Prisoner j
Prisoner i
Confess (C) (-6,-6) (0,-10)
Not Confess (NC) (-10,0) (-1,-1)
1
2
3
Payos: let u
i
i
(C, C) = 6; u
i
(C, NC) = 0;
u
i
(NC, C) = 10; u
i
(NC, NC) = 1;
j
(C, C) = 6; u
i
(C, NC) = 0;
u
i
(NC, C) = 10; u
i
(NC, NC) = 1
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Nash Equilibrium
Prisoner j
Prisoner i
Confess (C) (-6,-6) (0,-10)
Not Confess (NC) (-10,0) (-1,-1)
1
2
3
Payos: let u
i
i
(C, C) = 6; u
i
(C, NC) = 0;
u
i
(NC, C) = 10; u
i
(NC, NC) = 1;
j
(C, C) = 6; u
i
(C, NC) = 0;
u
i
(NC, C) = 10; u
i
(NC, NC) = 1
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Nash Equilibrium
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
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Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
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Nash Equilibrium
Iterative elimination of strictly dominated strategies:
Example 1
Prisoner j
Prisoner i
Confess (C) (-6,-6) (0,-10)
Not Confess (NC) (-10,0) (-1,-1)
Prisoner i C -6 0
NC -10 -1
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Nash Equilibrium
Iterative elimination of strictly dominated strategies:
Example 1
Prisoner j
Prisoner i
Confess (C) (-6,-6) (0,-10)
Not Confess (NC) (-10,0) (-1,-1)
Prisoner i C -6 0
NC -10 -1
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Iterative elimination of strictly dominated
strategies:Example 1
Prisoner i C -6 0
NC -10 -1
6 > 10 and 0 > 1 strategy NC is strictly dominated by
strategy C.
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Prisoner i C -6 0
NC -10 -1
strategy C.
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Prisoner j
Prisoner i
Confess (C) (-6,-6) (0,-10)
Not Confess (NC) (-10,0) (-1,-1)
Prisoner j
C NC
-6 -10
0 -1
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Prisoner j
Prisoner i
Confess (C) (-6,-6) (0,-10)
Not Confess (NC) (-10,0) (-1,-1)
Prisoner j
C NC
-6 -10
0 -1
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Nash Equilibrium
Prisoner j
C NC
-6 -10
0 -1
strategy C;
For two players, strategy NC is strictly dominated by strategy C.
Thus, the combination (C, C) is a solution of game.
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Nash Equilibrium
Prisoner j
C NC
-6 -10
0 -1
strategy C;
For two players, strategy NC is strictly dominated by strategy C.
Thus, the combination (C, C) is a solution of game.
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strategies:Notations and generalization
Let N = {1, 2, ..., n} be a set of players;
Each player has a set of strategies;
Let S
i
be strategies set of player i , the strategies prole set is
denoted by S = S
1
S
2
... S
n
.
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Let S
i
denoted by S = S
1
S
2
... S
n
.
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Let S
i
denoted by S = S
1
S
2
... S
n
.
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The elements of S are denoted by
s = (s
1
, s
2
, ..., s
n
) = (s
i
, s
i
), where
s
i
= (s
1
, ..., s
i 1
, s
i +1
, ..., s
n
);
When s S and b
i
S
i
,
(b
i
, s
i
) = (s
1
, ..., s
i i
, b
i
, s
i +1
, ..., s
n
) is obtained after
replacing s
i
by b
i
, and g(S
i
, s
i
) is the set of results which
agent i can obtain when the other agents choose s
i
from
S
i
=
j N,j =i
S
j
;
Payo function: Each player has a payo function
U
i
: S =
n
1
S
i
R.
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Nash Equilibrium
s = (s
1
, s
2
, ..., s
n
) = (s
i
, s
i
), where
s
i
= (s
1
, ..., s
i 1
, s
i +1
, ..., s
n
);
When s S and b
i
S
i
,
(b
i
, s
i
) = (s
1
, ..., s
i i
, b
i
, s
i +1
, ..., s
n
) is obtained after
replacing s
i
by b
i
, and g(S
i
, s
i
i
from
S
i
=
j N,j =i
S
j
;
U
i
: S =
n
1
S
i
R.
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Nash Equilibrium
s = (s
1
, s
2
, ..., s
n
) = (s
i
, s
i
), where
s
i
= (s
1
, ..., s
i 1
, s
i +1
, ..., s
n
);
When s S and b
i
S
i
,
(b
i
, s
i
) = (s
1
, ..., s
i i
, b
i
, s
i +1
, ..., s
n
) is obtained after
replacing s
i
by b
i
, and g(S
i
, s
i
i
from
S
i
=
j N,j =i
S
j
;
U
i
: S =
n
1
S
i
R.
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strategies:Generalization
Denition
Let = {N, (S
i
)
i N
, (u
i
)
i N
} be a normal form game. If
s
i
, s
i
S
i
, then s
i
is strictly dominated by s
i
if for all strategies
combination, the payo of player i is smaller with s
i
than that with
s
i
. Formally,
u
i
(s
1
, s
2
, ..., s
i 1
, s
i
, s
i +1
, ..., s
n
) < u
i
(s
1
, s
2
, ..., s
i 1
, s
i
, s
i +1
, ..., s
n
).
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Nash Equilibrium
Player 2
Player 1
L M R
U (1,0) (1,2) (0,1)
D (0,3) (0,1) (2,0)
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Nash Equilibrium
Player 1
L M R
U 1 1 0
D 0 0 2
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Nash Equilibrium
Player 1
L M R
U 1 1 0
D 0 0 2
For player 1, 1 > 0 and 1 > 0 but 0 < 2 player 1 does not
admit strictly dominated strategy.
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Nash Equilibrium
Player 2
Player 1
L M R
U (1,0) (1,2) (0,1)
D (0,3) (0,1) (2,0)
Player 2
L M R
0 2 1
3 1 0
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Nash Equilibrium
Player 2
L M R
0 2 1
3 1 0
2 > 1 and 1 > 0 strategy R is strictly dominated by strategy
M.
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Nash Equilibrium
The game become:
Player 2
Player 1
L M
U (1,0) (1,2)
D (0,3) (0,1)
For player 1, we have:
Player 1
L M
U 1 1
D 0 0
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Nash Equilibrium
Player 1
L M
U 1 1
D 0 0
strategy D is strictly dominated by strategy U;
Player 2 doses not admet strictly dominated strategy.
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Nash Equilibrium
Player 1
L M
U 1 1
D 0 0
strategy D is strictly dominated by strategy U;
Player 2 doses not admet strictly dominated strategy.
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Nash Equilibrium
The game will be reduced and we obtain:
Player 2
Player 1 L M
U (1,0) (1,2)
1
Player 1 is indierent between L and M;
2
For player 2, L is strictly dominated by M;
The combination (U, M) of payo (1, 2) is a solution of game.
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Player 2
Player 1 L M
U (1,0) (1,2)
1
2
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Nash Equilibrium
Player 2
Player 1 L M
U (1,0) (1,2)
1
2
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Nash Equilibrium
Player 2
Player 1 L M
U (1,0) (1,2)
1
2
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Nash Equilibrium
Player 2
Player 1
L C R
T (0,4) (4,0) (5,3)
M (4,0) (0,4) (5,3)
B (3,5) (3,5) (6,6)
In this game, The method of iterative elimination of strictly
dominated strategies can not give us a solution;
Thus, we proceed to another concept of solution in pure
strategy: it is Nash Equilibrium.
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Nash Equilibrium
Player 2
Player 1
L C R
T (0,4) (4,0) (5,3)
M (4,0) (0,4) (5,3)
B (3,5) (3,5) (6,6)
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Nash Equilibrium
Player 2
Player 1
L C R
T (0,4) (4,0) (5,3)
M (4,0) (0,4) (5,3)
B (3,5) (3,5) (6,6)
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Nash Equilibrium
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
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Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
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Nash Equilibrium
Nash Equilibrium: Example
Player 2
Player 1
L C R
T (0,4) (4,0) (5,3)
M (4,0) (0,4) (5,3)
B (3,5) (3,5) (6,6)
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Nash Equilibrium
Player 2
Player 1
L C R
T (0,4) (4,0) (5,3)
M (4,0) (0,4) (5,3)
B (3,5) (3,5) (6,6)
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Nash Equilibrium
Player 2
Player 1
L C R
T (0,4) (4,0) (5,3)
M (4,0) (0,4) (5,3)
B (3,5) (3,5) (6,6)
We obtain a Nash Equilibrium (B, R) of payos (6, 6).
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Nash Equilibrium
Player 2
Player 1
L C R
T (0,4) (4,0) (5,3)
M (4,0) (0,4) (5,3)
B (3,5) (3,5) (6,6)
We obtain a Nash Equilibrium (B, R) of payos (6, 6).
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Nash Equilibrium
In this example, we have:
For player 1:
U
1
(B, R) U
1
(T, R) for T {T, M, B};
U
1
(B, R) U
1
(M, R) for M {T, M, B};
For player 2:
U
2
(B, R) U
2
(B, L) for L {L, C, R};
U
2
(B, R) U
2
(B, C) for C {L, C, R}.
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Nash Equilibrium
Nash Equilibrium for two-player: Generalization
Concept of stability: situation where no player has interest to
deviate unilaterally of his strategy.
Denition
A Nash equilibrium for two-player in pure strategies of a normal
form game = {N = {1, 2}, (S
i
)
i =1,2
, (u
i
)
i =1,2
} is a prole of
strategies (s
1
, s
2
) such that the strategy of each player s
i
is a
better response to the strategies chosen by the other player (s
i 1
),
i.e., u
1
(s
1
, s
2
) u
1
(s
1
, s
2
) for all strategy s
1
S
1
;
u
2
(s
1
, s
2
) u
2
(s
1
, s
2
) for all strategy s
2
S
2
;
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Nash Equilibrium
Nash Equilibrium n Players
Denition (Nash 1951)
A Nash equilibrium for n players in pure strategies of a normal
form game = {N, (S
i
)
i N
, (u
i
)
i N
} is a prole of strategies
(s
1
, s
2
, ..., s
n
) such that the strategy of each player s
i
is a better
response to the strategies chosen by the other players
(s
1
, s
2
, ..., s
i 1
, ..., s
n
), i.e.,
u
i
(s
1
, s
2
, ..., s
i 1
, s
i
, s
i +1
, ..., s
n
) u
i
(s
1
, s
2
, ..., s
i 1
, s
i
, s
i +1
, ..., s
n
)
for all strategy s
i
S
i
.
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Nash Equilibrium
Nash equilibrium and iterative elimination (IE) method of
strictly dominated strategies
Proposition
If IE method eliminates all strategies except one then this strategy
is a Nash equilibrium;
If a strategy is a Nash equilibrium, then this strategy survives with
IE method.
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Nash Equilibrium
Multiplicity of Nash Equilibrium
Player 2
Player 1
O F
O (2,1) (0,0)
F (0,0) (1,2)
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Nash Equilibrium
Player 2
Player 1
O F
O (2,1) (0,0)
F (0,0) (1,2)
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Nash Equilibrium
Player 2
Player 1
O F
O (2,1) (0,0)
F (0,0) (1,2)
In this game, we have two Nash equilibrium! they are the
strategies prole (O, O) of payos (2,1) and the strategies prole
(F, F) of payos (1,2).
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Nash Equilibrium
Player 2
Player 1
O F
O (2,1) (0,0)
F (0,0) (1,2)
In this game, we have two Nash equilibrium! they are the
strategies prole (O, O) of payos (2,1) and the strategies prole
(F, F) of payos (1,2).
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Nash Equilibrium
A Game without a Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
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Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
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Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
This game does not admit a Nash equilibrium.
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Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
This game does not admit a Nash equilibrium.
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Nash Equilibrium
Existence of Nash Equilibrium: Some denitions and
theorems
Denition (Upper hemicontinuous correspondence)
Let X be a compact set. A correspondence F : X X is said to
be upper hemicontinuous if its graph
g(F) {(x, y) : x X, y F(x)} is a closed set (in the usual
topology). An equivalent requirement is that given any x
X
and some sequence {x
q
}
q=1
convergent to x
, every sequence
{y
q
}
q=1
with y
q
F(x
q
) has a limit point y
F(x
).
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theorems
Theorem (Kakutanis Fixed Point Theorem)
Let X R
m
(m N) be a compact, convex, and nonempty set,
and F : X X an upper hemicontinuous correspondence with
convex and noempty images (i.e., x X, F(x) is a nonempty and
convex subset of X). Then, the correspondence F has a xed
point, i.e., there exists some x
X such that x
F(x
).
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Nash Equilibrium
theorems
Denition (Quasi-concavity)
The function u
i
: S
1
S
2
... S
n
R is quasi-concave en s
i
if
for all strategies prole s
i
, the set {s
i
: u
i
(s
i
, s
i
) a} is convex.
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Nash Equilibrium
Existence of Nash Equilibrium: Debreu, Fan, Glicksbergs
Theorem, 1952
Theorem (Debreu, 1952; Fan, 1952; Glicksberg, 1952)
Let be a game in strategic form such that, for each
i = 1, 2, ..., n, S
i
R
m
is compact and convex, and the function
u
i
: S
1
S
2
... S
n
R is continuous in s = (s
1
, s
2
, ..., s
n
) and
quasi-concave in s
i
. Then, the game has a Nash equilibrium in
pure strategies.
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Nash Equilibrium
Economic application: Cournots duopoly model
Let two rms 1 and 2;
Let q1 = rm 1 quantity and q2 = rm 2 quantity;
Let P(Q) = a Q be inverse demand function of price P
where Q is the total quantity produced (Q = q
1
+ q
2
) and a
is the absorption capacity limit of market;
P(Q) =
_
a Q if Q a;
0 otherwise.
Firm i have the cost structure C
i
(q
i
) = cq
i
, the marginal costs
of production are equal and xed, they are represented by c.
Introduction
Nash Implementation
Nash Equilibrium
Following Cournot, rms strategically play the quantity
variable;
Players two rms;
Payos prot of each rm, i.e., u
i
(q
i
, q
j

i
(q
i
, q
j
1

i
(q
i
, q
j
= q
i
[a (q
i
+ q
j
) c];
2
The vector (q
i
, q
j
) is a Nash equilibrium if q
i
resolves
Max
q
i
[0,a]

i
(q
i
, q
j
) = Max
q
i
[0,a]
q
i
[a (q
i
+ q
j
) c].
Introduction
Nash Implementation
Nash Equilibrium
Introduction
Nash Implementation
Nash Equilibrium
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
Nash Implementation
Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
Introduction
Nash Implementation
Nash Equilibrium
Pareto Optimality: Example
Prisoner j
Prisoner i
C NC
C (-6,-6) (0,-10)
NC (-10,0) (-1,-1)
Introduction
Nash Implementation
Nash Equilibrium
Prisoner j
Prisoner i
C NC
C (-6,-6) (0,-10)
NC (-10,0) (-1,-1)
Introduction
Nash Implementation
Nash Equilibrium
Prisoner j
Prisoner i
C NC
C (-6,-6) (0,-10)
NC (-10,0) (-1,-1)
Introduction
Nash Implementation
Nash Equilibrium
Prisoner j
Prisoner i
C NC
C (-6,-6) (0,-10)
NC (-10,0) (1, 1
. .
)
1
The combinaison (C, C) is a Nash Equilibrium;
2
The combinaison (NC, NC) is a Pareto Otimality Equilibrium.
Introduction
Nash Implementation
Nash Equilibrium
Prisoner j
Prisoner i
C NC
C (-6,-6) (0,-10)
NC (-10,0) (1, 1
. .
)
1
2
Introduction
Nash Implementation
Nash Equilibrium
Prisoner j
Prisoner i
C NC
C (-6,-6) (0,-10)
NC (-10,0) (1, 1
. .
)
1
2
Introduction
Nash Implementation
Nash Equilibrium
Pareto Optimality: Denition
Denition
A set of strategies is Pareto-optimal i it is impossible to make at
least one person better o without making anyone else worse o.
Pareto solution selects the feasible strategies which are not weakly
dominated by an other strategy for all agents and not strictly
dominated for at least one player. Formally, it is dened as follows.
Let u U, P(u) = {s S : s S such that for all i N,
u
i
(s
i
, s
i
) u
i
(s
i
, s
i
), and for some i N,
u
i
(s
i
, s
i
) > u
i
(s
i
, s
i
)}.
Introduction
Nash Implementation
Nash Equilibrium
Pareto Optimal Nash Equilibrium: Denition
Denition
A Pareto optimal Nash equilibrium in pure strategies of a normal
form game = {N, (S
i
)
i N
, (u
i
)
i N
} is any Nash equilibrium
(s
1
, s
2
, ..., s
n
) such that there does not exist another Nash
equilibrium (s
1
, s
2
, ..., s
n
) with u
i
(s
1
, s
2
, ..., s
n
) < u
i
(s
1
, s
2
, ..., s
n
)
for all i N.
Introduction
Nash Implementation
Nash Equilibrium
Pareto Optimal Nash Equilibrium: Example
Firm j
Firm i
Wait Invest
Wait (400,400) (0,300)
Invest (300,0) (200,200)
Introduction
Nash Implementation
Nash Equilibrium
Firm j
Firm i
Wait Invest
Wait (400,400) (0,300)
Invest (300,0) (200,200)
Introduction
Nash Implementation
Nash Equilibrium
Firm j
Firm i
Wait Invest
Wait (400,400) (0,300)
Invest (300,0) (200,200)
The combinations (Wait,Wait) and (Invest,Invest) are two
Nash equilibria;
The combination (Wait,Wait) is Pareto Optimal Nash
Equilibrium.
Introduction
Nash Implementation
Nash Equilibrium
Firm j
Firm i
Wait Invest
Wait (400,400) (0,300)
Invest (300,0) (200,200)
Nash equilibria;
Equilibrium.
Introduction
Nash Implementation
Nash Equilibrium
Firm j
Firm i
Wait Invest
Wait (400,400) (0,300)
Invest (300,0) (200,200)
Nash equilibria;
Equilibrium.
Introduction
Nash Implementation
Nash Equilibrium
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
Nash Implementation
Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
Introduction
Nash Implementation
Nash Equilibrium
Example
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
Introduction
Nash Implementation
Nash Equilibrium
Example
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
Introduction
Nash Implementation
Nash Equilibrium
Example
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
In this game, there is not a Nash equilibrium in pure strategies.
Introduction
Nash Implementation
Nash Equilibrium
Example
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
In this game, there is not a Nash equilibrium in pure strategies.
Introduction
Nash Implementation
Nash Equilibrium
Mixed strategy
Mixed strategy is the uncertainty which a player has on what
the other can make (Harsanyi 1973);
A mixed strategy is a probability distribution (q, 1 q) where
q is probability to play H and 1 q is probability to play T;
The mixed strategy (0,1) is simply the pure strategy T.
Introduction
Nash Implementation
Nash Equilibrium
Mixed strategy: example
Player 2
Player 1
L M R
U (1,0) (1,2) (0,1)
D (0,3) (0,1) (2,0)
A mixed strategy for player 2 is a probability distribution (q,r,
1-q-r);
For example, the probability distribution (
1
3
,
1
3
,
1
3
) is equal for
L, M and R strategies.
Introduction
Nash Implementation
Nash Equilibrium
Player 2
Player 1
L M R
U (1,0) (1,2) (0,1)
D (0,3) (0,1) (2,0)
1-q-r);
1
3
,
1
3
,
1
3
) is equal for
Introduction
Nash Implementation
Nash Equilibrium
Player 2
Player 1
L M R
U (1,0) (1,2) (0,1)
D (0,3) (0,1) (2,0)
1-q-r);
1
3
,
1
3
,
1
3
) is equal for
Introduction
Nash Implementation
Nash Equilibrium
Mixed strategy: Denition
Denition (Mixed strategy)
Let s
i
= (s
i 1
, s
i 1
, ..., s
ij
, ..., s
ik
) be the strategies set of a player i . A
mixed strategy for this player is a distribution probability
P
i
= (P
i 1
, P
i 1
, ..., P
ij
, ..., P
ik
) with P
ij
is the realization probability
to choose s
ij
and
k
j =1
P
ij
= 1.
Introduction
Nash Implementation
Nash Equilibrium
Expected utility function: Example
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
If player 1 thinks that player 2 play strategy H with
probability q and play strategy q with probability 1 q, then
the expected utility of player 1 is:
1
q(1) + (1 q)1 = 1 2q if player 1 play H;
2
q(1) + (1 q)(1) = 2q 1 if player 1 play T.
Introduction
Nash Implementation
Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
1
2
Introduction
Nash Implementation
Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
1
2
Introduction
Nash Implementation
Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
1
2
Introduction
Nash Implementation
Nash Equilibrium
Expected utility function: Notation
Let (S
i
) denote the set of probability distributions over S
i
;
We identify this set with the simplex: P
i
(S
i
) implies
s
i
S
i
P
i
(s
i
) = 1 and P
i
(s
i
) 0;
We refer to P
i
(s
i
) as a mixed strategy, while the members of
S
i
are pure strategies;
The support of a probability measure is dened as x :
(x) > 0. For P (S
i
) the support of P
i
is all s
i
such that
P
i
(s
i
) 0.
The probability of obtaining a specic (pure) strategies prole
s = (s
j
)
j N
is
j N
P
j
(s
j
).
Introduction
Nash Implementation
Nash Equilibrium
Let (S
i
i
;
i
(S
i
) implies
s
i
S
i
P
i
(s
i
) = 1 and P
i
(s
i
) 0;
We refer to P
i
(s
i
S
i
(x) > 0. For P (S
i
) the support of P
i
is all s
i
such that
P
i
(s
i
) 0.
s = (s
j
)
j N
is
j N
P
j
(s
j
).
Introduction
Nash Implementation
Nash Equilibrium
Let (S
i
i
;
i
(S
i
) implies
s
i
S
i
P
i
(s
i
) = 1 and P
i
(s
i
) 0;
We refer to P
i
(s
i
S
i
(x) > 0. For P (S
i
) the support of P
i
is all s
i
such that
P
i
(s
i
) 0.
s = (s
j
)
j N
is
j N
P
j
(s
j
).
Introduction
Nash Implementation
Nash Equilibrium
Let (S
i
i
;
i
(S
i
) implies
s
i
S
i
P
i
(s
i
) = 1 and P
i
(s
i
) 0;
We refer to P
i
(s
i
S
i
(x) > 0. For P (S
i
) the support of P
i
is all s
i
such that
P
i
(s
i
) 0.
s = (s
j
)
j N
is
j N
P
j
(s
j
).
Introduction
Nash Implementation
Nash Equilibrium
Let (S
i
i
;
i
(S
i
) implies
s
i
S
i
P
i
(s
i
) = 1 and P
i
(s
i
) 0;
We refer to P
i
(s
i
S
i
(x) > 0. For P (S
i
) the support of P
i
is all s
i
such that
P
i
(s
i
) 0.
s = (s
j
)
j N
is
j N
P
j
(s
j
).
Introduction
Nash Implementation
Nash Equilibrium
Expected utility function: Denition
U
i
(P) =
sS
(
j N
P
j
(s
j
))u
i
(s).
Introduction
Nash Implementation
Nash Equilibrium
Two player mixed Nash equilibrium: Denition
Denition
A mixed strategy prole P
is a mixed strategy Nash Equilibrium

for two player if
U
1
(P
1
, P
2
) U
1
(P
1
, P
2
) for all distribution P
1
on S
1
;
U
2
(P
1
, P
2
) U
2
(P
1
, P
2
) for all distribution P
2
on S
2
.
Introduction
Nash Implementation
Nash Equilibrium
Two player mixed Nash equilibrium: Example
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
probability q and play strategy T with probability 1 q, then
1
2
The best response of player 1 in pure strategy is H if q <
1
2
, is
T if q >
1
2
, and player is indierent between H and T if
q =
1
2
.
Introduction
Nash Implementation
Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
1
2
1
2
, is
T if q >
1
2
q =
1
2
.
Introduction
Nash Implementation
Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
1
2
1
2
, is
T if q >
1
2
q =
1
2
.
Introduction
Nash Implementation
Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
1
2
1
2
, is
T if q >
1
2
q =
1
2
.
Introduction
Nash Implementation
Nash Equilibrium
Player 2
Player 1
H T
H (-1,1) (1,-1)
T (1,-1) (-1,1)
1
2
1
2
, is
T if q >
1
2
q =
1
2
.
Introduction
Nash Implementation
Nash Equilibrium
The best responses in mixed strategies:
1
For player 1: If player 1 play H with probability r and T with
probability 1 r , then for each value of q, we will seek the
value of r noted r
(q): (r
, 1 r
) is better response to
(q, 1 q);
U
1
(P
1
, P
2
) = r (1 2q) + (1 r )(2q 1)
= (2q 1) + r (2 4q), this function is increasing in r if
2 4q > 0 and it is decreasing if 2 4q < 0;
The best response r = 1 (i.e. H) if q <
1
2
, and the best
response r = 0 (i.e. T) if q >
1
2
;
Introduction
Nash Implementation
Nash Equilibrium
1
value of r noted r
(q): (r
, 1 r
(q, 1 q);
U
1
(P
1
, P
2
) = r (1 2q) + (1 r )(2q 1)
1
2
, and the best
1
2
;
Introduction
Nash Implementation
Nash Equilibrium
1
value of r noted r
(q): (r
, 1 r
(q, 1 q);
U
1
(P
1
, P
2
) = r (1 2q) + (1 r )(2q 1)
1
2
, and the best
1
2
;
Introduction
Nash Implementation
Nash Equilibrium
1
value of r noted r
(q): (r
, 1 r
(q, 1 q);
U
1
(P
1
, P
2
) = r (1 2q) + (1 r )(2q 1)
1
2
, and the best
1
2
;
Introduction
Nash Implementation
Nash Equilibrium
1
We make the same reasoning for player 2: for each value of r ,
we will seek the value of q noted q
(r ): (q
, 1 q
) is better
response to (r , 1 r );
If r <
1
2
, the best response is T (q
(r ) = 0;
If r >
1
2
, the best response is H (q
(r ) = 1;
If r =
1
2
, indierence.
Introduction
Nash Implementation
Nash Equilibrium
1
(r ): (q
, 1 q
) is better
If r <
1
2
(r ) = 0;
If r >
1
2
(r ) = 1;
If r =
1
2
, indierence.
Introduction
Nash Implementation
Nash Equilibrium
1
(r ): (q
, 1 q
) is better
If r <
1
2
(r ) = 0;
If r >
1
2
(r ) = 1;
If r =
1
2
, indierence.
Introduction
Nash Implementation
Nash Equilibrium
1
(r ): (q
, 1 q
) is better
If r <
1
2
(r ) = 0;
If r >
1
2
(r ) = 1;
If r =
1
2
, indierence.
Introduction
Nash Implementation
Nash Equilibrium
1
(r ): (q
, 1 q
) is better
If r <
1
2
(r ) = 0;
If r >
1
2
(r ) = 1;
If r =
1
2
, indierence.
Introduction
Nash Implementation
Nash Equilibrium
Introduction
Nash Implementation
Nash Equilibrium
Many players mixed Nash equilibrium
Theorem (Nash, 1951)
Let = {N, (S
i
)
i N
, (u
i
)
i N
} be strategic form game. If N is nite
and S
i
is nite for all i , then, there is at least a Nash equilibrium in
mixed strategies.
Introduction
Nash Implementation
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
Nash Implementation
Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
Introduction
Nash Implementation
The players intervene the ones after the others in a precise
order;
We suppose the nite number of strategies;
Introduction
Nash Implementation
The players intervene the ones after the others in a precise
order;
We suppose the nite number of strategies;
Introduction
Nash Implementation
The presentation of such game is to trace a tree (tree of
Kuhn):
If the number of blows is nite, the tree ends with sequences
of numbers that give the payo of each player.
Introduction
Nash Implementation
The presentation of such game is to trace a tree (tree of
Kuhn):
If the number of blows is nite, the tree ends with sequences
of numbers that give the payo of each player.
Introduction
Nash Implementation
The concept of subgames: Example
Suppose that we have a rm in monopoly situation (M);
Introduction
Nash Implementation
Suppose that we have a new rm (NF) who want to make a
decision to enter or not to the market;
Introduction
Nash Implementation
Introduction
Nash Implementation
The concept of subgames: Backward induction method
Monopoly rm M decision:
1
if NF does not enter, it suces for M to continue to produce
the same quantity;
2
if NF enters, M may nd it benecial to yield since it ensures a
positive prot equalizes to 4.
New rm NF decision: the rm NF which anticipates the
choice of M by putting itself at the place of M:
1
NF decides to enter;
Solution: NF enters and M yields payo (4,4).
This method is called: Backward induction method: it
consists in reasoning starting from the end.
Introduction
Nash Implementation
1
the same quantity;
2
1
Introduction
Nash Implementation
1
the same quantity;
2
1
Introduction
Nash Implementation
1
the same quantity;
2
1
Introduction
Nash Implementation
1
the same quantity;
2
1
Introduction
Nash Implementation
1
the same quantity;
2
1
Introduction
Nash Implementation
1
the same quantity;
2
1
Introduction
Nash Implementation
Backward induction method: Example
Introduction
Nash Implementation
Introduction
Nash Implementation
Introduction
Nash Implementation
Introduction
Nash Implementation
Introduction
Nash Implementation
Introduction
Nash Implementation
Introduction
Nash Implementation
Introduction
Nash Implementation
Introduction
Nash Implementation
Introduction
Nash Implementation
Introduction
Nash Implementation
Solution strategies:
Payo:
Remark: This solution is not Pareto optimal < (5,5,5)
Introduction
Nash Implementation
Solution strategies:
Payo:
Remark: This solution is not Pareto optimal < (5,5,5)
Introduction
Nash Implementation
Kuhns Theorem, 1953
Theorem (Kuhn, 1953)
Every dynamic game with perfect information has a Nash
equilibrium.
Introduction
Nash Implementation
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
Nash Implementation
Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
Introduction
Nash Implementation
Introduction
Nash Implementation
Denitions
4 Players
Players 1 and 2 choose simultaneously two strategies s
1
S
1
and s
2
S
2
;
Players 3 and 4 observe s
1
and s
2
and choose simultaneously
s
3
S
3
and s
4
S
4
;
u
i
(s
1
, s
2
, s
3
, s
4
), i = 1, ..., 4.
Denition
Suppose that (s
1
, s
2
) is the unique Nash equilibrium in the rst
stage and (s
3
((s
1
, s
2
)), s
4
((s
1
, s
2
))) a Nash equilibrium in the
second stage. The solution (s
1
, s
2
, s
3
((s
1
, s
2
)), s
4
((s
1
, s
2
))) is
subgame perfect Nash equilibrium.
Introduction
Nash Implementation
Denitions
4 Players
1
S
1
and s
2
S
2
;
1
and s
2
s
3
S
3
and s
4
S
4
;
u
i
(s
1
, s
2
, s
3
, s
4
), i = 1, ..., 4.
Denition
Suppose that (s
1
, s
2
stage and (s
3
((s
1
, s
2
)), s
4
((s
1
, s
2
1
, s
2
, s
3
((s
1
, s
2
)), s
4
((s
1
, s
2
))) is
Introduction
Nash Implementation
Denitions
4 Players
1
S
1
and s
2
S
2
;
1
and s
2
s
3
S
3
and s
4
S
4
;
u
i
(s
1
, s
2
, s
3
, s
4
), i = 1, ..., 4.
Denition
Suppose that (s
1
, s
2
stage and (s
3
((s
1
, s
2
)), s
4
((s
1
, s
2
1
, s
2
, s
3
((s
1
, s
2
)), s
4
((s
1
, s
2
))) is
Introduction
Nash Implementation
Denitions
4 Players
1
S
1
and s
2
S
2
;
1
and s
2
s
3
S
3
and s
4
S
4
;
u
i
(s
1
, s
2
, s
3
, s
4
), i = 1, ..., 4.
Denition
Suppose that (s
1
, s
2
stage and (s
3
((s
1
, s
2
)), s
4
((s
1
, s
2
1
, s
2
, s
3
((s
1
, s
2
)), s
4
((s
1
, s
2
))) is
Introduction
Nash Implementation
Denitions
4 Players
1
S
1
and s
2
S
2
;
1
and s
2
s
3
S
3
and s
4
S
4
;
u
i
(s
1
, s
2
, s
3
, s
4
), i = 1, ..., 4.
Denition
Suppose that (s
1
, s
2
stage and (s
3
((s
1
, s
2
)), s
4
((s
1
, s
2
1
, s
2
, s
3
((s
1
, s
2
)), s
4
((s
1
, s
2
))) is
Introduction
Nash Implementation
Example: international economy
Two countries 1 and 2
In each country we nd:
1
A government which selected a rate;
2
A rm which produces a good for internal consumption and for
export;
3
Consumers who buy from the inside market compounding
resident rm and nonresident rm.
Let P
i
(Q
i
) = a Q
i
be inverse demand function of price P
i
where Q
i
is the total quantity in market i and a is the
absorption capacity limit of market.
Introduction
Nash Implementation
1
2
export;
3
Let P
i
(Q
i
) = a Q
i
i
where Q
i
Introduction
Nash Implementation
1
2
export;
3
Let P
i
(Q
i
) = a Q
i
i
where Q
i
Introduction
Nash Implementation
1
2
export;
3
Let P
i
(Q
i
) = a Q
i
i
where Q
i
Introduction
Nash Implementation
1
2
export;
3
Let P
i
(Q
i
) = a Q
i
i
where Q
i
Introduction
Nash Implementation
1
2
export;
3
Let P
i
(Q
i
) = a Q
i
i
where Q
i
Introduction
Nash Implementation
1
2
export;
3
Let P
i
(Q
i
) = a Q
i
i
where Q
i
Introduction
Nash Implementation
A rm in country i produces a quantity h
i
for internal
consumption and a quantity e
i
for export;
Q
i
= h
i
+ e
j
, where e
j
is the exported quantity by the foreign
rm j to the market of country i ;
Firms have constants marginal costs c and no xed cost,
c
i
(h
i
, e
i
) = c(h
i
+ e
i
);
Each rm i pays a tax t
j
if it exports e
i
.
Introduction
Nash Implementation
i
for internal
i
for export;
Q
i
= h
i
+ e
j
, where e
j
c
i
(h
i
, e
i
) = c(h
i
+ e
i
);
j
if it exports e
i
.
Introduction
Nash Implementation
i
for internal
i
for export;
Q
i
= h
i
+ e
j
, where e
j
c
i
(h
i
, e
i
) = c(h
i
+ e
i
);
j
if it exports e
i
.
Introduction
Nash Implementation
i
for internal
i
for export;
Q
i
= h
i
+ e
j
, where e
j
c
i
(h
i
, e
i
) = c(h
i
+ e
i
);
j
if it exports e
i
.
Introduction
Nash Implementation
The game:
1
Governments play in non-cooperative way in variable tax;
2
Firms observe tax rates and produce for internal consumption
and for export ;
3
The payo functions for rms:
i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) =
[a (h
i
+ e
j
)]h
i
+ [a (e
i
+ h
j
)]e
i
c(h
i
+ e
i
) t
j
e
i
For governments;
payos= the total welfare;
= consumer surplus + prot of the resident rm + tax;
=
1
2
Q
2
i
+
i
+ t
i
e
j
.
Introduction
Nash Implementation
The game:
1
2
and for export ;
3
i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) =
[a (h
i
+ e
j
)]h
i
+ [a (e
i
+ h
j
)]e
i
c(h
i
+ e
i
) t
j
e
i
For governments;
=
1
2
Q
2
i
+
i
+ t
i
e
j
.
Introduction
Nash Implementation
The game:
1
2
and for export ;
3
i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) =
[a (h
i
+ e
j
)]h
i
+ [a (e
i
+ h
j
)]e
i
c(h
i
+ e
i
) t
j
e
i
For governments;
=
1
2
Q
2
i
+
i
+ t
i
e
j
.
Introduction
Nash Implementation
The game:
1
2
and for export ;
3
i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) =
[a (h
i
+ e
j
)]h
i
+ [a (e
i
+ h
j
)]e
i
c(h
i
+ e
i
) t
j
e
i
For governments;
=
1
2
Q
2
i
+
i
+ t
i
e
j
.
Introduction
Nash Implementation
The game:
1
2
and for export ;
3
i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) =
[a (h
i
+ e
j
)]h
i
+ [a (e
i
+ h
j
)]e
i
c(h
i
+ e
i
) t
j
e
i
For governments;
=
1
2
Q
2
i
+
i
+ t
i
e
j
.
Introduction
Nash Implementation
The game:
1
2
and for export ;
3
i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) =
[a (h
i
+ e
j
)]h
i
+ [a (e
i
+ h
j
)]e
i
c(h
i
+ e
i
) t
j
e
i
For governments;
=
1
2
Q
2
i
+
i
+ t
i
e
j
.
Introduction
Nash Implementation
The game:
1
2
and for export ;
3
i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) =
[a (h
i
+ e
j
)]h
i
+ [a (e
i
+ h
j
)]e
i
c(h
i
+ e
i
) t
j
e
i
For governments;
=
1
2
Q
2
i
+
i
+ t
i
e
j
.
Introduction
Nash Implementation
We solve this game:
If (t
1
, t
2
) is a Nash equilibrium in stage 1 and if
(h
1
, e
1
, h
2
, e
2
) is a Nash equilibrium in stage 1, then (h
i
, e
i
)
must solve Max
h
i
,e
i
0

i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) (*);
i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) =
h
i
[a (h
i
+ e
j
) c] + e
i
[a (e
i
+ h
j
) c] t
j
e
i
= prot in market i + prot in market j .
Introduction
Nash Implementation
We solve this game:
If (t
1
, t
2
(h
1
, e
1
, h
2
, e
2
i
, e
i
)
must solve Max
h
i
,e
i
0

i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) (*);
i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) =
h
i
[a (h
i
+ e
j
) c] + e
i
[a (e
i
+ h
j
) c] t
j
e
i
Introduction
Nash Implementation
We solve this game:
If (t
1
, t
2
(h
1
, e
1
, h
2
, e
2
i
, e
i
)
must solve Max
h
i
,e
i
0

i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) (*);
i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
) =
h
i
[a (h
i
+ e
j
) c] + e
i
[a (e
i
+ h
j
) c] t
j
e
i
Introduction
Nash Implementation
(*) becomes:
Max
h
i
0
h
i
[a (h
i
+ e
j
) c] h
i
=
ac+t
i
3
;
Max
e
i
0
e
i
[a (e
i
+ h
j
) c] t
j
e
i
e
i
=
ac2t
j
3
.
Introduction
Nash Implementation
(*) becomes:
Max
h
i
0
h
i
[a (h
i
+ e
j
) c] h
i
=
ac+t
i
3
;
Max
e
i
0
e
i
[a (e
i
+ h
j
) c] t
j
e
i
e
i
=
ac2t
j
3
.
Introduction
Nash Implementation
(*) becomes:
Max
h
i
0
h
i
[a (h
i
+ e
j
) c] h
i
=
ac+t
i
3
;
Max
e
i
0
e
i
[a (e
i
+ h
j
) c] t
j
e
i
e
i
=
ac2t
j
3
.
Introduction
Nash Implementation
After solving the second stage, we will solve the rst stage:
Max
t
i
0

i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
);
After calculates: Total
welfare=
(2(ac)t
i
)
2
18
+
(ac+t
i
)
2
9
+
(ac2t
j
)
2
9
+ t
i
(ac2t
i
)
3
;
t
i
=
ac
3
, i = 1, 2;
h
i
=
4(ac)
9
, e
i
=
ac
9
.
Introduction
Nash Implementation
Max
t
i
0

i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
);
welfare=
(2(ac)t
i
)
2
18
+
(ac+t
i
)
2
9
+
(ac2t
j
)
2
9
+ t
i
(ac2t
i
)
3
;
t
i
=
ac
3
, i = 1, 2;
h
i
=
4(ac)
9
, e
i
=
ac
9
.
Introduction
Nash Implementation
Max
t
i
0

i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
);
welfare=
(2(ac)t
i
)
2
18
+
(ac+t
i
)
2
9
+
(ac2t
j
)
2
9
+ t
i
(ac2t
i
)
3
;
t
i
=
ac
3
, i = 1, 2;
h
i
=
4(ac)
9
, e
i
=
ac
9
.
Introduction
Nash Implementation
Max
t
i
0

i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
);
welfare=
(2(ac)t
i
)
2
18
+
(ac+t
i
)
2
9
+
(ac2t
j
)
2
9
+ t
i
(ac2t
i
)
3
;
t
i
=
ac
3
, i = 1, 2;
h
i
=
4(ac)
9
, e
i
=
ac
9
.
Introduction
Nash Implementation
Max
t
i
0

i
(t
i
, t
j
, h
i
, e
i
, h
j
, e
j
);
welfare=
(2(ac)t
i
)
2
18
+
(ac+t
i
)
2
9
+
(ac2t
j
)
2
9
+ t
i
(ac2t
i
)
3
;
t
i
=
ac
3
, i = 1, 2;
h
i
=
4(ac)
9
, e
i
=
ac
9
.
Introduction
Nash Implementation
Introduction
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
Nash Implementation
Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
Introduction
Nash Implementation
Introduction
1
Introduction
2
Nash Equilibrium
3
4
information
5
Nash Implementation
Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
Introduction
Nash Implementation
Introduction
Denition of implementation
Introduction
Nash Implementation
Introduction
Denition of the implementation
A social choice correspondence (SCC): is a correspondence F
from a set of class of admissible preference into the set of
alternatives (or options) A, that associates with every
preference prole R a nonempty subset of A;
A solution concept: is represented by the set of Nash
equilibria N(g, R, S) of the game (, R).
A mechanism (or form game): is given by = (S, g) where
S =
i N
S
i
; S
i
denotes the strategy set of the agent i and g
is a function from S to A;
Implementability:F(R) = g(N(g, R, S)).
Introduction
Nash Implementation
Introduction
Maskins Mechanism (1977,1999)
- R
i
: a preference relation of the individual i (complete, transitive,
and reexive);
- L(a, R
i
) = {b A | aR
i
b} is the lower contour set for agent i at
alternative a;
Rule 1: If for each i N, s
i
= (R, a, m) and a F(R), then
g(s) = a.
Rule 2: If for some i , s
j
= (R, a, m) for all j = i , a F(R) and
s
i
= (R
i
, a
i
, m
i
) = (R, a, m), then:
g(s) =
_
a
i
if a
i
L(a, R
i
),
a otherwise.
Rule 3: In any other situation, g(s) = a
i
, where i
is the index of
the player of which the number m
i
is largest. If there are several

individuals who check this condition, the smallest index i will be
chosen.
Introduction
Nash Implementation
Introduction
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
Nash Implementation
Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
Introduction
Nash Implementation
Introduction
Denition (Maskin monotonicity)
A SCC F satises monotonicity if for all R, R
, for any
a F(R), if for any i N, L(a, R
i
) L(a, R
i
), then a F(R
).
Example 1: F satises Maskin monotonicity.
R: R
1
R
2
R
3
b b a
a c c
c a b
,
R
: R
1
R
2
R
3
a b a
b a c
c c b
F(R) = {a} F(R
) = {a}
Introduction
Nash Implementation
Introduction
Example 2: F does not satisfy Maskin monotonicity.
R: R
1
R
2
R
3
b b a
a c c
c a b
,
R
: R
1
R
2
R
3
b a a
a b c
c c b
F(R) = {a, b} F(R
) = {b}
Theorem (Maskin 1977,1999)
If a SCC F is Nash implementable, then F satises monotonicity.
Proof.
Introduction
Nash Implementation
Introduction
Denition (No veto power)
A SCC F satises no veto power if for i , R , and a A, if
L(a, R
j
) = A for all j N\{i }, then a F(R).
Example 3:
R: R
1
R
2
R
3
a a b
b c c
c b a
F(R) = {a}
Theorem (Maskin 1977,1999)
If n 3, and if a SCC satises monotonicity and no veto power
conditions, then F is Nash implementable.
Introduction
Nash Implementation
Introduction
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
Nash Implementation
Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
Introduction
Nash Implementation
Introduction
Borda rule
For this rule, each individual assigns points to alternatives
according to its ranking, for example, for the m alternatives
available, the favorite alternative obtains m points, the next m 1
and so on. The Borda rule selects alternatives which have the
highest score.
Introduction
Nash Implementation
Introduction
Borda rule
Example. Let N = {1, 2, 3} and X = {x, y, z}. Let R, R
be
dened by:
R: R
1
R
2
R
3
x y z
y x x
z z y
R
: R
1
R
2
R
3
x,y y z
z x x,y
z
B(R) = {x} B(R
) = {y}
We have x B(R), it is very easy to see that the inclusion of
Maskin monotonicity is checked, but x / B(R
).
Introduction
Nash Implementation
Introduction
Plurality rule
For this rule, each individual assigns points to top-ranking
alternatives. The Plurality rule selects alternatives which have the
highest score. The plurality rule does not satisfy Maskin
monotonicity as shown in the following example.
Introduction
Nash Implementation
Introduction
Plurality rule
be
dened by:
R: R
1
R
2
R
3
y x x
x y z
z z y
R
: R
1
R
2
R
3
y x,y x,y
x,z z z
P(R) = {x} P(R
) = {y}
We have x P(R), it is very easy to see that the inclusion Maskin
monotonicity is checked, but x / P(R
).
Introduction
Nash Implementation
Introduction
Anti-plurality rule
For this rule, each individual assigns the equal points to all ranking
alternatives, except for bottom-ranked alternative, it assigns zero
point. The Anti-plurality rule selects alternatives which have the
highest score. This rule does not satisfy Maskin monotonicity as
shown in the following example.
Introduction
Nash Implementation
Introduction
Anti-plurality rule
be
dened by:
R: R
1
R
2
R
3
z y z
y x x
x z y
R
: R
1
R
2
R
3
z y z
y x,z x
x y
A(R) = {x, y, z} A(R
) = {z}
We have x, y A(R), it is very easy to see that the inclusion of
Maskin monotonicity is checked, but x, y / A(R
) .
Introduction
Nash Implementation
Introduction
Related literature: other works
Moore and Reppulo (1990): necessary and sucient
conditions;
Sjostrom(1991): algorithm;
Danilov (1992), Yamato (1992): strong monotonicity
(sucient);
Ziad (1997, 1998): version of strong monotonicity (necessary)
+ algorithm;
Benot and Ok (2006): Maskin monotonicity + limited veto;
Doghmi and Ziad (2008), variants of monotonicity + variants
of no-veto power + unanimity.
Introduction
Nash Implementation
Introduction
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
Nash Implementation
Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
Introduction
Nash Implementation
Introduction
Danilovs - Yamatos theorems: Essential options
Denition (Essential options)
Let i be a player and B A. An alternative b B is essential for i
in set B if b F(R) for some preference prole R such that
L(b, R
i
) B. The set of all essential elements is denoted as
Ess
i
(F, B).
Introduction
Nash Implementation
Introduction
Danilovs - Yamatos theorems: Strong monotonicity
Denition (Strong monotonicity)
A SCC F satises strong monotonicity if for all R, R
and for
all a F(R), if for all i N, Ess
i
(F, L(a, R
i
)) L(a, R
i
), then
a F(R
).
Introduction
Nash Implementation
Introduction
Danilovs - Yamatos theorems: Example of strong
monotonicity
Example 1: F satises strong monotonicity.
R: R
1
R
2
R
3
a c c
b b b
c a a
,
R
: R
1
R
2
R
3
a c c
c a a
b b b
F(R) = {a, b} F(R
) = {a}
Introduction
Nash Implementation
Introduction
Danilovs - Yamatos theorems: Example of strong
monotonicity.
Example 2: F does not satisfy strong monotonicity
R: R
1
R
2
R
3
a c c
b a a
c b b
,
R
: R
1
R
2
R
3
b c c
a a a
c b b
F(R) = {a, c} F(R
) = {c}
Introduction
Nash Implementation
Introduction
Theorem (Danilov (1992), Yamato (1992))
If n 3, and if a SCC satises strong monotonicity, then F is
Nash implementable.
Introduction
Nash Implementation
Introduction
Yamatos Mechanism
Rule 1: If for each i N, s
i
= (R, a, 0) and a F(R), then
g(s) = a.
Rule 2: If for some i , s
j
= (R, a, 0) for all j = i , a F(R) and
s
i
= (R
i
, a
i
, m
i
) = (R, a, 0), then:
g(s) =
_
a
i
if a
i
Ess
i
(F, L(a, R
i
)),
a otherwise.
Rule 3: In any other situation, g(s) = a
i
, where
i = (
j N
n
j
)(mod n) + 1.
Introduction
Nash Implementation
Introduction
Applications in exchange economies with single-peaked
preferences
Introduction
Nash Implementation
Introduction
Applications in exchange economies with single-peaked
preferences
Thomson (1990): intersections of the monotonic SCCs satisfy
neither no veto power nor strong monotonicity. He
implemented these correspondences by dicult algorithm;
Doghmi and Ziad (2008) identied new simple sucient
conditions to implement these correspondences.
Introduction
Nash Implementation
Introduction
What happens about the implementability of the SCCs in
these restricted domains when there are indierent
preferences?
Introduction
Nash Implementation
Nash implementation in exchange economies with single-plateaued preferences
Plan
1
Introduction
2
Nash Equilibrium
3
4
information
5
Nash Implementation
Introduction
Borda rule
Plurality rule
Anti-plurality rule
6
Indierences
Introduction
Nash Implementation
Single-plateaued preferences
Figure: Single-plateaued preferences.
Introduction
Nash Implementation
Indierent options subset
Denition (Indierent options subset)
For any agents i preference R
i
, any alternative a F(R), for some
singleton operator {o} LI (a, R
i
) with o = a, the indierent
options subset is the subset I (a, o, R
i
) = {b A \ {a, o} s.t.
a
i
b
i
o}.
Remark
I (a, o, R
i
) = if |LI (a, R
i
)| 3, otherwise I (a, o, R
i
) = .
Introduction
Nash Implementation
Indierent options subset
Denition (Indierent options subset)
For any agents i preference R
i
, any alternative a F(R), for some
singleton operator {o} LI (a, R
i
) with o = a, the indierent
options subset is the subset I (a, o, R
i
) = {b A \ {a, o} s.t.
a
i
b
i
o}.
Remark
I (a, o, R
i
) = if |LI (a, R
i
)| 3, otherwise I (a, o, R
i
) = .
Introduction
Nash Implementation
I-monotonicity
Denition (I-monotonicity)
A SCC F satises I-monotonicity if for all R, R
, for any
a F(R), if for any i N, LS(a, R
i
) I (a, o, R
i
) L(a, R
i
), then
a F(R
).
Introduction
Nash Implementation
Example
Example 1: A = {a, b, c, d, e, f }, N = {1, 2, 3} and = {R, R
}
are dened by:
R: R
1
R
2
R
3
e b b,d
a,c,d a,c a,c
f d f
b f e
e
R
: R
1
R
2
R
3
a,b,c,d,e b a,b
f ad c,d
c e,f
e,f
F(R) = {a, f } F(R
) = {a, b, c}
Introduction
Nash Implementation
I -weak no veto power
Denition (I -weak no veto power)
A SCC F satises I -weak no veto power if for i , R , and
a F(R), if for R
, b LS(a, R
i
) I (a, o, R
i
) L(b, R
i
) and
L(b, R
j
) = A for all j N\{i }, then b F(R
).
Remark
If I (a, o, R
i
) = , then I -weak no veto power becomes equivalent
to strict weak no veto power. Otherwise, there is no-logical
relationship between the two conditions.
Introduction
Nash Implementation
I -weak no veto power
Denition (I -weak no veto power)
A SCC F satises I -weak no veto power if for i , R , and
a F(R), if for R
, b LS(a, R
i
) I (a, o, R
i
) L(b, R
i
) and
L(b, R
j
) = A for all j N\{i }, then b F(R
).
Remark
If I (a, o, R
i
) = , then I -weak no veto power becomes equivalent
to strict weak no veto power. Otherwise, there is no-logical
relationship between the two conditions.
Introduction
Nash Implementation
Unanimity
Denition (Unanimity)
An SCC F satises unanimity if for any a A, any R , and for
any i N, L(a, R
i
) = A implies a F(R).
Introduction
Nash Implementation
Doghmi and Ziads theorem
Theorem (Doghmi and Ziad (2012))
Let n 3. If a SCC F satises I-monotonicity, I -weak no veto
power and unanimity, then F can be implemented in Nash
equilibria.

Course Games Theory INSEA 2012-2013

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Course Games Theory INSEA 2012-2013

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Introduction

Simultaneous Games with complete - imperfect information

is a mixed strategy Nash Equilibrium

is largest. If there are several

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