Lecture 3

Ongoing interactions:
Dynamic games of
complete information
- Part 1
Outline
Extensive-form games
Sub-game perfect equilibrium, one-step deviation principle
Stackelberg equilibrium
Interventions: Policing, treats, punishments
Repeated games formalism, equilibria, automata
Direct vs. Indirect Reciprocity
Tit-for-Tat etc.
Ratings, Reputations
Tokens/fiat-money
Bayesian Games
Illustrative examples and comparisons

Questions/comments/observations are always
encouraged, at any point during the lecture!!

Dynamic games
players
who moves at each turn
knowledge at each turn
choices at each turn
outcomes
appropriate notion of solution
Include
Hidden actions (normal form games)
Hidden information (Bayesian games)

Framework + solution notion(s) complicated

Begin with
Complete information: no hidden actions
Perfect information: no hidden information
Extensive form games
The normal form game representation does not incorporate
any notion of sequence, or time, of the actions of the players
The extensive form is an alternative representation that
makes this temporal structure explicit.
Two variants:
perfect information extensive-form games (= a game
where every player knows all the moves played by all the
players before)
imperfect-information extensive-form games
Extensive form games - definition
Extensive form games - definition
Extensive form games - definition
Game-tree representation
Example
Example
Game-tree representation
Example: the sharing game
Pure-strategies in perfect-information games
Pure-strategies example
Nash equilibria
Idea: the game finite => has a set of penultimate nodes => players moving at these
nodes choose strategies leading to the terminal node(s) with max payoff. The players
That have successors the penultimate nodes, choose actions that max their payoffs,
Given the choice of penultimate nodes etc. . resulting strategy is PSNE
Induced normal form
Induced normal form
Induced normal form
New (stronger) equilibrium concepts needed?
MAD game
On the board
Chain-store game
We now define an equilibrium refinement concept
that does not suffer from this threat credibility problem
Subgame
Simplified: A subgame is determined by assuming that a certain
history has already happened and considering the game from that
point onward
Subgame example
Subgame perfect equilibrium
Backwards induction algorithm
Identify all terminal subgames
Determine the Nash eq. for these subgames
Modify the original game tree by replacing the terminal
subgames with the Nash equilibrium payoffs
Repeat until the three is reduced to one stage game, and
then determine the Nash equilibrium.
Example backwards induction algorithm
What about the
MAD and CS games?
MAD Game

Chain Store Game
Subgame perfect equilibrium - example
Bargaining Game of Alternating Offers
(Extensive Form Game)

Player 1
(1), (1) x M x
Player 2
(1), (1) x M x
accept reject
Player 2
(2), (2) M y y
Round 1
Player 1
accept reject
(2), (2) M y y
Player 1
Round 2
Round 3
Another example: Alternative offers
(Bargaining)



Another example: Alternative offers
(Bargaining)



Another example: Alternative offers
(Bargaining)






Another example: Stackelberg
competition



Theorem (Zermelo)
Every finite extensive form game of complete
and perfect information has a sub-game perfect
equilibrium (SGPE). If there are no ties, SGPE is
unique.
Proof:
Backwards induction
Pruning the tree
Remarks
Imperfect information



Example
Recall:
Example
Information sets for player 1: { } and {( , ),( , )}
4 pure strategies for player 1, corresponding to the
information sets { } and {( , ),( , )}:
and , and , and and and
L A L B
L A L B
L l L r R l R r

Normal form game

Induced normal form
Mixed and behavioral strategies
It turns out there are two meaningfully different kinds of
randomized strategies in imperfect information extensive
form games
mixed strategies
behavioral strategies
Mixed strategy: randomize over pure strategies
Behavioral strategy: independent coin toss every time an
information set is encountered

A mixed strategy is a distribution of vectors (each vector
describing a pure strategy)
A behavioral strategy is a vector of distributions
Mixed and behavioral strategies
Two types of randomization:
Mixed strategy: user randomizes over pure strategies
Behavioral strategy: users plans a collection of
randomizations, one for each point at which it needs to
take an action

Mixed strategies and behavioral strategies are
equivalent for games of perfect recall
No player ever forgets any information it knew
Nash eq. in behavioral strategies = profile such that no
player can increase its expected payoff by using a
different behavioral strategy.
Give an example of a behavioral strategy:
A with probability .5 and G with probability .3
Give an example of a mixed strategy that is not a
behavioral strategy:
(.6(A,G), .4(B,H)) (Why not? Because the choices made by him
at the two nodes are not independent)
In this game every behavioral strategy corresponds to a
mixed strategy..
What about imperfect-recall games? Examples next
Games of imperfect recall
Games of imperfect recall