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1. Definition of a game
2. Elements of a game
• Player
• Strategy
• Payoff
– The payoff of one player is the function of other players’ strategies as well as his strategy.
– The payoff of player i can be denoted by ui (si , s−i ) where si is a particular strategy of
player i and s−i is that of other players.
3. Representation
• normal form
• extensive form
1
• Formally, we write G = hI, (Si )i∈I , (π)i∈I i.
Player 2
L R
U a, b c, d
Player 1
D e, f g, h
4. Solution Concept
Prisoner 2
Confess Deny
Confess 0, 0 10, −5
Prisoner 1
Deny −5, 10 5, 5
2
Figure 2. Payoff matrix for Prisoners
• If payoff matrix follows Figure 3, NE is given by (Ballet, Ballet) and (Soccer, Soccer).
• In this case, players have no incentive to depart form the equilibrium (self-enforcing agree-
ment).
Female
Ballet Soccer
Ballet 5, 10 0, 0
Male
Soccer 0, 0 10, 5
3
Lecture 2 (March 5, 2014)
1. Types of a game
• Non-cooperative game
• Cooperative game
2. Elements
• Player
• Strategy
• Payoff
• Extensive form
4. Equilibrium concept
• Dominant strategy equilibrium (DSE): This does not exist in almost every case.
1
• may not exist
– hard to predict
– Ex) battle of sexes
– Refinement is required.
Player 2
H T
H 1, −1 − 1, 1
Player 1
T − 1, 1 1, −1
Definition 6. : Given player i’s (finite) pure strategy set Si , a mixed strategy for player i,
σi : Si → [0, 1], assigns to each pure strategy si ∈ Si a probability σi (si ) ≥ 0 that it will be
P
played, where si ∈Si σi (si ) = 1.
• Let
2
of player i.
where
mi
X
mi
Σi = {σi ∈ R | σij = 1, σij ≥ 0, ∀ j}
j=1
X
πi∗ (σi , . . . , σn ) = πi (S1 , . . . , SI )σ(S1 , . . . , SI ).
S1 ,...,SI
• Let
Si = {H, T },
σi : Si → [0, 1],
α = probability that Player 1 chooses H,
β = probability that Player 2 chooses H,
payoff matrix of each player be given as Figure 4.
• For player 1,
β − (1 − β) = −β + (1 − β).
3
• Then β ∗ = 1/2 and symmetrically, α∗ = 1/2.
• One interesting feature is that one player’s equilibrium strategies is determined by other
player’s decision.
4
Appendix
• Intuitively, a function fails to be continuous if it displays a “jump” in its value at some point
x.
(i) We say that a set A ⊂ X is open (relative to X) if for every x ∈ A there is an ε > 0 such
that k x′ − x k< ε and x′ ∈ X implies x′ ∈ A.
5
• Given a point x ∈ RN , a set B = {x′ ∈ RN :k x′ − x k< ε} for some scalar ε > 0 is called an
open ball around x.
• A set A ⊂ X is open (relative to X) if, for every point x in A, there is an open ball around x
all of whose elements (in X) are elements of A.
Theorem A.1. : Fix a set X ⊂ RN . In what follows, all the open and closed sets are relative
to X.
(i) The union of any number, finite or infinite, of open sets is open. The intersection of a
finite number of open sets is open.
(ii) The intersection of any number, finite or infinite, of closed sets is closed. The union of a
finite number of closed sets is closed.
(iii) A set A ⊂ X is closed if and only if for every sequence xm → x ∈ X, with xm ∈ A for all
m, we have x ∈ A.
• Property (iii) of Theorem A.1 is noteworthy because it gives us a direct way to characterize a
closed set:
– a set A is closed if and only if the limit point of any sequence whose members are all
elements of A is itself an elements of A.
• Points (in X) that are the limits of sequences whose members are all elements of the set A
are known as the limit points of A.
– Property (iii) says that a set A is closed if and only if it contains all of its limit points.
Definition A.4. :
6
• Given a function f : X → Rk , the image of a set A ⊂ X under f (·) is the set f (A) = {y ∈
RK : y = f (x) for some x ∈ A}.
(i) The image of a compact set under f (·) is compact: That is, if A ⊂ X is compact, then
f (A) = {y ∈ RK : y = f (x) for some x ∈ A} is a compact subset of RK .
(ii) Suppose that K = 1 and X is compact. Then f (·) has a maximizer: That is, there is
x ∈ X such that f (x) ≥ f (x′ ) for every x′ ∈ X.
• For every x ∈ A, f (x) is composed of precisely one element, then f (·) can be viewed as a
function in the usual sense.
7
Definition A.8. : Given A ⊂ RN and the closed set Y ⊂ RK , the correspondence f : A → Y
is upper hemicontinuous (uhc) if it has a closed graph and the images of compact sets are
bounded, that is, for every compact set B ⊂ A the set f (B) = {y ∈ Y : y ∈ f (x) for some x ∈
B} is bounded.
Theorem A.3. : Given A ⊂ RN and the closed set Y ⊂ RK , suppose that f : A → Y is a single-
valued correspondence (so that it is, in fact, a function). Then f (·) is an upper hemicontinuous
correspondence if and only if it is continuous as a function.
• Roughly speaking, upper hemicontinuity is compatible with “explosions”, while lower hemi-
continuity is compatible with “implosions”.
• When correspondence is both upper and lower hemicontinuous, we say that it is continuous.
8
Theorem A.5. : Tarsky’s Fixed Point Theorem Suppose that f : [0, 1]N → [0, 1]N is a
nondecreasing function, that is, f (x′ ) ≥ f (x) whenever x′ ≥ x. Then f (·) has fixed point; that
is, there is an x ∈ A such that x = f (x).
– The base set is not any compact, convex set, but rather special one - an N -product of
intervals.
– The function is required to be nondecreasing.
– The function is not required to be continuous.
• Consumer i’s preferences over consumption bundles xi = (x1i , . . . , xLi ) in his consumption
set Xi ⊂ RL are represented by the utility function ui (·).
• The total amount of each good ℓ = 1, . . . , L initially available in economy, called the total
endowment of good ℓ, is denoted by wℓ ≥ 0 for ℓ = 1, . . . , L.
• Each firm j has available to it the production possibilities summarized by the production set
Yj ⊂ R L .
• If (y1 , . . . , yJ ) ∈ RLJ are the production vectors of the J firms, the total (net) amount of good
P
ℓ available to the economy is wℓ + j yℓj .
9
Definition A.10. :
• Pareto optimal means that there is no alternative way to organize the production and distri-
bution of goods that makes some consumer better off without making some other consumer
worse off.
• The criterion of Pareto optimality does not insure that an allocation is in any sense equitable.
• Pareto optimality serves as an important minimal test for the desirability of an allocation; it
does, at the very least, say that there is no waste in the allocation of in society.
References
10
Lecture 3 (March 10, 2014)
1. Continuity of Correspondence
• Notations
– A ⊂ Rm
– B ⊂ Rk
– xq : a sequence on A such that xq → x0 ∈ A
– y q : a sequence on B such that y q → y 0
– ϕ : A → B: a correspondence from A to B
Definition 7 :
(i) For any two sequences xq and y q with y q ∈ f (xq ) for every q, if we have y 0 ∈ ϕ(x0 ),
correspondence ϕ is upper hemicontinuos at x0 .
(ii) For every sequence xq and every y 0 ∈ ϕ(xq ), if there exists y q ∈ ϕ(xq ), correspondence ϕ
is lower hemicontinuos at x0 .
Theorem 1 : Graph
Φ ≡ {(x, y)|x ∈ A, y ∈ ϕ(x)}
1
Theorem 3 : (Debreu) Let G = hI, (si )i∈I , (πi )i∈I i. Suppose the following hold.
P ROOF : Let the best response correspondence BRi (s−i ) = {x ∈ Si |πi (x, s−i ) ≥ πi (y, s−i ), ∀ y ∈ Si }.
1. Show ‘BRi (s−i ) is nonempty.’
Since Si is compact and πi is continuous in s, there exists maximum and minimum values of πi by
Weierstrass theorem.
However, since x1 and x2 are best response for s−1 , πi (x3 , s−i ) cannot be greater than πi (x1 , s−i )
or πi (x2 , s−i ). Thus we have
BR : S1 × S2 . . . × Sn → S1 × S2 · · · × Sn .
There exists
BR(S1 , . . . , Sn ) = BRi (S−1 ) × BRi (S−2 ) · · · × BRi (S−n ).
Then correspondence BR is nonempty, convexed and upper hemicontinuous.
2
Appendix
Theorem A.2. : Let f be a function defined on a convex set U in Rn . Them the following
statements are equivalent to each other:
Definition A.2. : Let {an }∞ n=1 be a sequence. Let f be a strictly increasing function from P
into P. The sequence {af (n) }∞ ∞
n=1 is called a subsequence of the sequence {an }n=1 .
Theorem A.2. : (Bolzano-Weierstrass Theorem) Every bounded real sequence has a conver-
gent subsequence.
3
P ROOF : Let {an } be a bounded sequence. Then there is a closed interval [c, d] such that an ∈ [c, d]
for every positive integer n.
Consider the two closed intervals
c+d c+d
c, , ,d .
2 2
One of these intervals must contain an for infinitely many positive integers n. We denote this
interval by [c1 , d1 ].
We repeat this process with the interval [c1 , d1 ]. One of the intervals
c1 + d1 c1 + d1
c1 , , , d1 .
2 2
must contain an for infinitely many positive integers n. We denote this interval by [c1 , d2 ]. Contin-
uing process, we obtain a sequence
[c1 , d1 ], [c2 , d2 ], . . .
and
d−c
dk − ck = , k = 1, 2, . . . (A.1)
2k
and each interval [ck , dk ] contains an for infinitely many positive integer n.
Choose a positive integer n1 such that an1 ∈ [c1 , d1 ]. Since [c2 , d2 ] contains an for infinitely many
positive integers n, there exists a positive integer n2 > n1 such that an2 ∈ [c2 , d2 ]. Continuing this
process we obtain elements an1 , an2 , . . . satisfying
and
n1 < n2 < n3 < · · · .
Therefore, {ank }∞
k=1 is a subsequence of {an }. We will show that {ank } converges.
The sequence {ck } is monotone and bounded so is convergent. Let L = limk→∞ ck . Similarly,
the sequence {dk } converges to some number M. Using equation (A.1), we have
d−c
M − L = lim dk − lim ck = lim (dk − ck ) = lim = 0.
k→∞ k→∞ k→∞ k→∞ 2k
ck ≤ ank ≤ dk .
4
References
5
Lecture 4 (March 12, 2014)
Theorem 3 : (Debreu) Let G = hI, (si )i∈I , (πi )i∈I i. Suppose the following hold.
P ROOF : Let the best response correspondence BRi (s−i ) = {x ∈ Si |πi (x, s−i ) ≥ πi (y, s−i ), ∀ y ∈ Si }.
1. Show ‘BRi (s−i ) is nonempty.’
Since Si is compact and πi is continuous in s, there exists maximum and minimum values of πi by
Weierstrass theorem.
However, since x1 and x2 are best response for s−1 , πi (x3 , s−i ) cannot be greater than πi (x1 , s−i )
or πi (x2 , s−i ). Thus we have
By the continuity of π,
π(s0i , s0−1 ) ≥ πi (y, s0−1 ), ∀ y ∈ si .
BR : S1 × S2 . . . × Sn → S1 × S2 · · · × Sn .
1
There exists
BR(S1 , . . . , Sn ) = BRi (S−1 ) × BRi (S−2 ) · · · × BRi (S−n ).
Then correspondence BR is nonempty, convexed and upper hemicontinuous.
(i) Nonempty
Since BRi is nonempty, we can choose element such that
(ii) Convex-valued
Since, for every s′i and s′′i , ti s′i + (1 − ti )s′′i ∈ BRi , ∀ i and ∀ ti ∈ (0, 1), we have every s′ ∈ BR
and s′′ ∈ BR. Thus
because
s∗ ∈ S1 × · · · Sn s.t. s∗ ∈ BR(s∗ ).
Theorem 4 : (Nash) There exists at least one mixed strategy Nash equilibrium for any finite
game.
P ROOF : Let G = hI, (Si )i∈I , (πi )i∈O i. Then we have the mixed extension of G = hI, (Σi )i∈I , (πi )∗i∈I i
where
mi
X
mi
Σ = {σi ∈ R | σij = 1, ∀ i σij = 1},
j=1
X
πi∗ (σ1 , ·, σn ) = σ(s1 , . . . , sn )πi (s1 , . . . , sn ).
σ1 ,...,σn
2
Then Σi is nonempty, compact and convex, and πi is linear in σi and that πi is linear in σi implies
that πi∗ is continuous and quasi concave in σi . Therefore there exists a mixed Nash equilibrium.
3
• In a single person strategy, weakly dominate strategy dose not used in equilibrium.
• In a multi person strategy (game theory), weakly dominate strategy would be used in equi-
librium.
Remark 1 : Strictly dominated strategy is never used in any mixed strategy equilibrium.
t1 t2 t3 t4
s1 1, 1 5, 2 0, 0 5, 1 2
s2 2, 5 6, 6 2, 8 4, 3 4
s3 0, 0 8, 2 4, 4 1, 1
s4 1, 5 3, 4 1, 1 3, 3 2
3 3 1
Figure 5. Iterative elimination in two person game
Definition 9 : The set of strategy for each player left after iterated elimination of strictly
dominated strategy is called sophisticated equilibrium and if the set is singleton, the game is
called a dominance solvable game.
4
Player 2
t1 t2 t3
s1 1 3 5
Player 1 s2 5 3 1
s3 2 2 2
5
References
6
Lecture 5 (March 17, 2014)
Si0 = Si
Σ0i = Σi
Sik+1 = {si ∈ Sik | ∄ σi ∈ Σki s.t. πi (σi , s−i ) > πi (si , s−i ), ∀ s−i ∈ S−i
k
}
Σk+1
i = {σi ∈ Σi |σi (si ) > 0, only if si ∈ Sik+1 }
(i) If Sit = Sit+1 for all i ∈ I and for some t, the set S t = S1t × . . . Snt is the set of sophisticated
equilibrium
L R
U 1, 1 1, 1
D 1, 1 0, 0 1
1
L R
U 1, 1 1, 1
D 1, 1 0, 0
1
Figure 5. Elimination of weakly dominated strategy by changing order 1
L M R
U 10, 2 2, 2 -1, 0
D 10, 4 -1, 0 3, 1
1 1
L M R
U 10, 2 2, 2 -1, 0 2
D 10, 4 -1, 0 3, 1
1
Figure 6. Elimination of weakly dominated strategy by changing order 1
• Figure 5 and Figure 6 show that remained strategy would be difference when weakly domi-
nated strategies are eliminated spontaneously and when eliminated sequentially.
• The statement “I saw that Chulsu saw the accident“ is not the case of common knowledge
since Chulsu does not know that I know what Chulsu knows.
2
Implicit Assumption of Game Theory : Platers have common knowledge about
Player 2
a b c d
A 4, 10 3, 0 2, 6 2, 6
Player 1
B 0, 0 1, 10 10, 3 3, 6
• Is A rationalizable?
• Is B rationalizable?
3
Sophisticated Equilibrium
Rationalizability
NE
Definition 11 :
(i) si ∈ Si is 1-rationalizable strategy for player i if si is the best response to some probability
distribution over strategies for other players.
(ii) si ∈ Si is a k-rationalizable strategy for player i if si is the best response to some proba-
bility distribution over (k − 1) rationalizable strategy for other players.
Theorem 5 :
(i) In two-person game, the set of rationalizable strategy equals to the set of sophisticated
equilibrium.
(ii) If |I| ≥ 3, the set of rationalizable strategy is the subset of sophisticated equilibrium.
Home Assignment 1
1.“Divide-the dollar” game. There is $1. Player 1 and Player 2 bid x and y, respectively, and
4
their payoff function is given by
(x, y) if x + y ≥ 1
g(x, y) =
(0, 0) if x + y > 1.
Player 2
L R
T 1, 1 1, 0
Player 1 M 3, 0 0, 3
B 0, 1 4, 0
5
References
6
Lecture 6 (March 19, 2014)
0 1 x
(2) Strategy T of Player 2 is strictly dominated by mixed strategy σ1 = (0, 1/2, 1/2) of Player 1.
Thus we have
1
• Selten (1975) points that (0, 0) is not sensible and suggests trembling hand perfect equilibrium.
Player 2
L R
T 1, 1 0, 0
Player 1
M 0, 0 0, 0
Definition 12 : For any normal form game G(I) = hI, (Σi )i∈I , (πi )i∈I i, we can define per-
turbed game G(ε) = hI, (Σi )i∈I (ε), (πi )i∈I i where
Definition 13 : A Nash equilibrium (σ1 , σ2 , . . . , σn ) of game G(I) = hI, (Σi )i∈I , (πi )i∈I i is
trembling-hand perfect equilibrium if there is some sequence of perturbed games such that
• Note if
lim πi (σiε , σ−i
ε ε
) ≥ πi (σi′ , σ−i )
ε→0
then
πi (σi , σ−i ) ≥ πi (σi′ , σ−i )
by continuity of πi .
2
Player 2
L R A2
T 1, 1 0, 0 -1, -2
Player 1 M 0, 0 0, 0 0, -2
• Let probability that Player II choose (U, D, A1 ) by mistake be (ε′1 , ε′2 , ε′3 ).
• If we exclude from payoff matrix in Figure 12, strategies A1 and A2 , (U, L) is perfect equilib-
rium.
ε ε
πi (si , σ−i ) < πi (s′i , σ−i )
NE
Perfect Equilibrium
Proper Equilibrium
3
Figure 13. Relation among Nash equilibrium, perfect equilibrium and proper equilibrium
4
References
5
Lecture 7 (March 24, 2014)
• Suppose Player 2 chooses L with probability q and R with probability 1 − q and then we have
u(T ) = 1
u(M ) = 3q
u(B) = 4(1 − q),
Player 2
L R
T 1, 1 1, 0
Player 1 M 3, 0 0, 3
B 0, 1 4, 0
1
u(·)
u(M )
u(T )
u(B)
0 4 q
7
BR1
BR2
p
2
Lecture 8 (March 26, 2014)
• Major difference between normal form game and extensive game is that the former can im-
pose commitment while the latter cannot.
• Tree is
• Terminology
– Starting node
– B follows A
– Terminal (node): no following node
• Description
1
(−1, −1)
fight
Monopolist
enter
not enter
(0, 2)
(−1, −1)
fight
Monopolist
seriously
information set
enter
accommodate (1, 1)
(−1, 0)
fight
casually
enter
Entrant
accommodate (1, 1)
not enter
(0, 2)
• imperfect information game: There exist information sets which does not consist of singleton.
2
(1, −1)
H
II
H
T (−1, 1)
I
(−1, 1)
H
T
T (1, −1)
Si : Hi → Ai
|{z} |{z}
information set action set
(1, −1)
H
II
H
T (−1, 1)
I
(−1, 1)
H
T
T (1, −1)
• Player I
3
– Strategy: H, T
– Action: H, T
• Player II
Player II
HH HT TH TT
H 1, −1 1, −1 1, −1 − 1, 1
Player I
T − 1, 1 1, −1 − 1, 1 1, −1
– In Figure 23, Nash equilibriums are given by (enter, accommodate) and (not, fight).
– The former is not plausible since this depends on Monopolist’ empty threat.
Monopolist
fight accommodate
enter − 1, −1 1, 1
Entrant
not 0, 2 0, 2
4
Lecture 9 (March 31, 2014)
(i) all nodes in the same hji ∈ Hi must have the same number of immediate successors.
Definition 16 : A subgame of an extensive form game is a subset of the game having the
following properties:
1. It does not cut nay information set, i.e., if a node is contained in a subgame, all other
nodes in the information set containing the node must be contained in the subgame.
Definition 17 : A Nash equilibrium is subgame perfect if for all subgames, the restriction of
the strategies to the subgame constitutes a Nash equilibrium in the subgame.
• In Figure 24, worker’s strategy set is given by {train, not train} and employer’s is given by
{hh, hn, nh, nn}.
• We see from Figure 25 that Nash equilibriums are given by (not train, hh), (train, hn) and
(not train, nh).
• In this game, subgame perfect Nash equilibrium (SPNE) is given by (not train, hh).
1
(5, 8)
hire
Employer
train
not (−1, 0)
Worker
(6, 4)
hire
not
not (0, 0)
Worker
hh hn nh nn
train 5, 8 5, 8 − 1, 0 − 1, 0
Employer
not train 6, 4 0, 0 6, 4 0, 0
Definition 18 : Behavioral strategy for player i is a probability distribution over the action
available on each information set of player i.
• Strategy sets of Player I and Player II are given by {H, T } and {HH, HT, T H, T T }, respec-
tively.
2
• Suppose Player II chooses m1 .
1 1 1
Pα (H) = P (HH) + P (HT ) = + =
4 4 2
1 1 1
Pα (T ) = P (T H) + P (T T ) = + =
4 4 2
1 1 1
Pβ (H) = P (HH) + P (T H) = + =
4 4 2
1 1 1
Pβ (H) = P (HT ) + P (T T ) = + =
4 4 2
(1, −1)
H
II
H α
T (−1, 1)
I
(−1, 1)
H
T β
II
T (1, −1)
• Behavioral strategy assumes independence between strategies while mixed strategy permits
correlation between them.
3
• Thus behavioral strategy is contained in mixed strategy.
Mixed Strategy
Behavioral Strategy
Definition 19 : Player i has perfect recall if and only if for every h1i , h2i ∈ Hi if a node x ∈ h2i
follows a choice z at h′i then every node y ∈ h2i follows the same choice z.
4
Lecture 10 (April 2, 2014)
• In Figure 27, Player I cannot remember his choice at information set h11 at the time he reaches
information set h21 .
1 1
u
h21 2 4
T 1
d 0 4
II
u 0 0
U B
Player II d 0 0
h11
I
1
u 0 4
D T 1 1
d 2 4
u 0 0
B
Player I 0 0
d
m1 b 1
1
• Suppose Player I attempts to make a choice at h11 .
• Thus Player I’s behavioral strategy at h11 and h21 are given by
1 1 1
b1 (h1 ) = ,
2 2
2 1 1
b1 (h1 ) = , ,
2 2
respectively.
• As shown in Figure 27, probability distribution generated by mixed strategy m1 and this
generated by behavioral strategy b1 .
– Mixed strategy m1 permits correlation between choices U and D at h11 and that u and d
at h21 , while behavioral strategy b1 does not.
– If worker chooses ‘not train’ and employer chooses ‘hire’, we call this on-the-equilibrium
path (depicted with blue line).
– Other pathes are called off-the equilibrium path.
• In SPNE, we should specify choices both cases when they lies on-the-equilibrium path and
when off-the equilibrium path.
2
(5, 8)
hire
Employer
train
not (−1, 0)
Worker
(6, 4)
hire
not
not (0, 0)
• Since Du and Dd have exactly the same payoff regardless of Player II’s choice, we can obtain
reduced normal form game as in Figure 29.
• Reduced normal form game does not affect Nash equilibrium but it could affect trembling
hand perfect equilibrium.
u
I
ℓ
II d
U
r
I
3
Player II
ℓ r
Uu ·, · ·, ·
Ud ·, · ·, ·
Player I
Du ·, · ·, ·
Dd ·, · ·, ·
Figure 29. An extensive form game and its reduced normal form
(−1, −1)
fight
Monopolist
seriously
enter
accommodate (1, 1)
(−1, 0)
fight
casually
enter
Entrant
accommodate (1, 1)
not enter
(0, 2)
4
Monopolist
accommodate fight
Not enter 0, 2 0, 2
• Entrant has strategy set {SE, CE, N E} and monopolist has strategy set {a, f }.
Definition 20 : A pair of (behavior) strategy profile and beliefs ((σi∗ )i∈I , µ) constitutes a weak
perfect Bayesian equilibrium if and only if
(i) (sequential rationality) at each information set h, player’s actions is optimal given strat-
egy of others and beliefs,
(ii) (consistency) beliefs are computed from strategy by using Bayesian law whenenver pos-
sible, i.e.,
∗
pσ (t)
µ(t) = σ∗
p (h)
∗
where pσ (h) > 0 is the probability that a path reaches information set h in equilibrium
∗ ∗
and pσ (t) is the probability a path reaches t in h. If pσ (h) = 0, we place a arbitrary
belief.
5
– Claim 1: Nash equilibrium (N E, f ) is not a weak PBE.
is a weak PBE.
– Claim 3: Nash equilibrium (SE, a) is a weak PBE. P ROOF : We set µ = 1. Then (SE, a)
is a weak PBE.
(−1, −1)
fight
Monopolist
µ
seriously
Information set 1
enter
accommodate (1, 1)
(−1, 0)
fight
casually
enter
Entrant
1−µ
accommodate (1, 1)
not enter
(0, 2)
Home Assignment 2
6
(1, −2)
ℓ
II
r
t (−3, −1)
(3, 1)
ℓ
m
I
r
(−2, −1)
b
(0, 2)
7
Lecture 11 (April 7, 2014)
(1, −2)
ℓ
II
µ
r
t (−3, −1)
(3, 1)
ℓ
m
I
1−µ
r
(−2, −1)
b
(0, 2)
Player 2
ℓ r
t 1, −2 −3, −1
Player 1 m 3, 1 −2, −1
b 0, 2 0, 2
1
3. Find wPBE.
– Thus
2
m, ℓ, µ <
3
can be a candidate of wPBE.
– Since Player I must choose m, wPBE is given by
(m, ℓ, µ = 0) ,
– Thus
2
b, r, µ >
3
can be a candidate of wPBE.
2
– Since arbitrary belief is available on off-the-equilibrium path, Player I’s another
wPBE is given by
2
b, f, µ > ,
3
which satisfies consistency constraint.
• Suppose µ = 2/3 and then Player II will choose some mixed strategy.
– Let p denote the probability that Player II chooses ℓ.
– Payoff function of Player I can be written as
4p − 3 for t,
′
u2 (·) = 5p − 2 for m,
0
for b.
• Claim: (ne, se, f ) is still wPBE. P ROOF : If we set µ = 1, we directly see this.
(1, −2)
a
M
µ
se
f
(−3, −1)
E
e (3, 1)
a
ce
E
1−µ
f
ne (−2, −1)
(0, 2)
3
Figure 34. Extensive form game of entry deterrence III
Player 2
a f
se 1, −2 −3, −1
Player 1
ce 3, 1 −2, −1
Definition 21 : Perfect Bayesian Equilibrium (PBE) is wPBE which includes wPBE in every
subgame.
(i) (sequential rationality) for every i and for every information set h, σi is optimal to (σ−i , µ)
(ii) (consistency) µ is a limit of {µn } such that µnh (x) = pσ (x(h)) for some a sequence of
n
• Let
4
• We have
λn αn
µn (α) = = αn
λn
and limαn →0 µn = αn = 0 which satisfies consistency.
βn
α
αn
1 − βn
E
λn
βn
1 − αn β
E
1 − βn
1 − λn
• We see that
SE ⊂ PBE ⊂ SPE ⊂ NE.
5
Lecture 13 (April 14, 2014)
• Two features
(i) Nature moves first (Player, strategy and payoff are chosen).
(ii) All players are not perfectly informed of the nature’s choice choice for other players
(Asymmetric information occurs).
Player 2 Player 2
L R L R
U 3, 1 3, 0 U 3, 0 2, 1
Player 1 Player 1
D 0, 1 4, 1 D 0, 0 4, 1
t1 t2
1
L (3, 1)
U
R (2, 0)
II
t1 L (0, 1)
D
R (4, 0)
N I
L (3, 0)
t2 U
R (2, 1)
II
L (0, 0)
D
R (4, 1)
• Game structure
Definition # : A Bayesian Nash equilibrium (BNE) is a set of strategy rule {s∗i (ti )} such that
each player maximized his expected payoff givne his type and other player’s strategy rule.
• Suppose there are Player I and Player II then BNE is formally defined as follows:
– BNE is a pair of strategy rule ({s∗1 (ti )}, s∗2 (t2 )) such that ∀ t1 ∈ T1 and ∀ s1 ∈ S1 ,
Z Z
π1 (s1 (t1 ), s2 (t2 ), t1 , t2 ) p(t2 |t1 )dt2 ≥ π1 (s1 , s∗2 (t2 ), t1 , t2 ) p(t2 |t1 )dt2 ,
∗ ∗
and ∀ t2 ∈ T2 and ∀ s2 ∈ S2 m
Z Z
π2 (s∗1 (t1 ), s∗2 (t2 ), t1 , t2 ) p(t1 |t2 )dt1 ≥ π2 (s∗1 (t1 ), s2 , t1 , t2 ) p(t1 |t2 )dt1 .
2
Example # BNE of Example #
Player 2 Player 2
L R L R
U 3, 1 3, 0 U 3, 0 2, 1
Player 1 Player 1
D 0, 1 4, 1 D 0, 0 4, 1
t1 t2
• Nash equilibrium:
(U, L) if t = t1
(D, R) if t = t2
U : 3p + 2(1 − p) = p + 2
D : 0 + 4(1 − p) = 4(1 − p).
• BNE:
U if p > 2/5
s1 =
D if p < 2/5
L if t = t
1
s2 =
R if t = t
2
3
Example # BNE of the Modification of Normal Form Game in Example #
Player 2 Player 2
L R L R
U 3, 1 3, 0 U 3, 0 2, −1
Player 1 Player 1
D 0, 1 4, 1 D 0, 0 4, −1
t1 t2
• BNE:
s1 = 3
L if t = t1
s2 =
L if t = t2
• Pooling equilibrium: BNE which does not classify the types of players (Example #)
N f (−1, 0)
enter
soft a (1, 1)
E
not (0, 2)
4
Figure # Entry deterrence x
• BNE
– Pooling equilibrium:
(i)
s1 (t) = enter ∀ t
s2 = a
(ii)
– Separating equilibrium:
• Let p = 1/2.
h (9, 5)
H
train
W n (−1, 0)
high h (7, 3)
not
n (0, 0)
N
h (6, −1)
train
low n (−4, 0)
W h (−1, 1)
not
H n (0, 0)
5
Lecture 19 (May 14, 2014)
Forward Induction
(−3, −3)
R
R
C (−1, 1)
E
M
enter
(1, −1)
R
C
E
C (−2, −2)
not
(0, −2)
M
R C
R − 3, −3 −1, 1
E
C 1, −1 −2, −2
1
• We can iterative eliminate of weakly dominated strategy as follows.
M
C R
not enter 0, -2 0, -2 3
E enter C -2, -2 1, -1
F
s t
s 3, 1 −2, 0
burn M
t −2, 0 2, 2
M
F
s t
not burn s 5, 1 0, 0
M
t 0, 0 1, 5
2
F
ss st ts tt
bs 3, 1 3, 1 -2, 0 -2, 0 5
nt 0, 0 1, 5 0, 0 1, 5 3
4 2 2
Figure #. Battle of the sexes with burning money
M
R C
R −1, −1 1, 3
enter 1
E
C 3, 1 −1, −1
E
M
R C
enter 2 R 0, 0 2, 1
E
C 1, 2 0, 0
3
Lecture 20 (May 19, 2014)
s t s t
s 3, 1 −2, 0 s 5, 1 0, 0
t −2, 0 −1, 5 t 0, 0 1, 5
• Forward induction
Essential Equilibrium
Definition # : σ ∈ G is an essential equilibrium if for every ε > 0, there exists δ > 0 such
that d(G, G′ )δ then there exists a Nash equilibrium σ ′ ∈ G′ such that d(σ, σ ′ ) ∈ ε.
L M R
U 1, 1 1, 0 0, 0
D 1, 1 0, 0 0, 1
1
Figure #. Not a essential equilibrium
• If we set some perturbation of given NEs such as (U, L) = (1+ε, 1+ε) or (D, L) = (1+ε, 1+ε),
the NEs are not stable.
• Essential equilibrium is set-valued solution concept while previous studied equilibriums are
pint-valued solution concept.
• Axiomatic approach
– existence
– backward induction
– invariance of inessential trasform
– admissibility (not weakly dominated)
– iterative dominance
– existence
– backward induction
– invariance
– admissibility
– iterated dominance
– forward induction
– connectedness
2
Theorem # : The set of NE consists of finitely many connected components
Theorem # : At least one component of Nash equilibrium contains a stable set in the same
that for any perturbation in payoffs, a Nash equilibrium is close to the component.
(−1, −1)
fight
Monopolist
enter
not enter
(0, 2)
enter 1, 1 − 1, −1
E
not 0, 2 0, 2
3
– Find NE sets (including mixed strategy equilibrium)
1 if q > 1/2
p = [0, 1] if q = 1/2
0
if q < 1/2
[0, 1] if p = 0
q =
1 if p > 0
Remark # :
4
Lecture 21 (May 21, 2014)
1. existence
2. backward induction
3. invariance
4. admissibility
5. iterated dominance
6. forward induction
7. connectedness
Definition # : A closed set S of Nash equilibrium is a hyper stable set if it is minimal with
respect to the following property:
• For every perturbed normal form game, there exists a Nash equilibrium close to S.
• Sequential equilibrium
– violate 3 and 4
• Perfect equilibrium
– violate 6
– violate 4 and 5
1
T B
T 0, 0 3, 1
in B 1, 3 0, 0
out
(2, 2)
T B
T 0, 0 3, 1
B 1, 3 0, 0
O 2, 2 2, 2
• It is noted that (OB, T ) is SPE, PE and proper equilibrium but it is not a forward induction
equilibrium.
Definition # : A closed set S on Nash equilibrium is a stable set if it is minimal with respect to
the following property: for every η > 0 and for some ε′ > 0, ∀ ε < ε′ and for any perturbation
(ε(si )), every perturbed game G(ε) with 0 < ε < ε′ has an equilibrium within η of some
equilibrium in the set.
• Note that stable set ⊂ fully stable set ⊂ hyper stable set.
Example #
2
1
a 2 , −1
h
f 1
2 , −1
E II
enter a (1, 1)
ℓ
I f (−1, −1)
not
(0, 2)
a f
1 1
Eh 2 , −1 2 , −1
Eℓ 1, 1 −1, −1
not 0, 1 0, 2
3
• NEs are given by (p2 = 1, q = 1) and p1 = 1, q < 4 .
Example #
3
(2, 0, 0)
T ℓ (0, 3, 3)
L
r (5, 1, 1)
I
ℓ (5, 1, 1)
M
R
NT r (1, 0, 0)
II III
ℓ (1, 0, 0)
L
B (5, 1, 1)
r
ℓ (5, 1, 1)
R
r (0, 3, 3)
• Sequential set: 0, 21 , 12 , 12 , 21 , , 1 1
2, 2
4
mixed strategy와 benavioral strategy
수업 시간에 예를 든 perfect recall game에서 player 1의 순수전략: Uuu, Uud, Udu, Udd,
Duu, Dud, Ddu, Ddd
1. 내가 예로 들려고 했던 mixed strategy는 처음에 U하면 나중에도 u하는 전략과 처음에
D하면 나중에도 d하는 전략을 각각 1/2로 택하는 전략
즉 Uud는 처음에 U하고 이처럼 U하면 나중에 u, D하면 나중에 d를 하는 것이므로 수업시
간에 예를 든 Uuu처럼 처음에 D를 해도 나중에 u를 하는 전략보다 내가 생각하는 perfect
correlation strategy의 의미에 보다 잘 부합한다. 그러면 player 2가 무조건 확률 1로 T라는
순수전략을 택한다고 할 때 terminal node에 induce하는 확률분포는 위부터 (1/2,
0,0,0,0,1/2,0,0)이 된다. 이제 이와 동일한 확률분포를 induce하는 behavior strategy를 구
하면 우선 player 1의 첫 information set 에서 U를 택할 확률은 Uuu, Uud, Udu, Udd를
택할 확률의 합이므로 1/2이 되므로 이다. 이제 두 번째 information set
에서 u를 어떤 확률로 택해야 위와 같은 확률분포를 induce하는가? ×× 가 되
려면 이 되어야 한다. 따라서 임. 마지막으로 세 번째 information set
에서 u를 택할 확률은 × × 이어야 하므로 , 따라서 이 되면
위와 동일한 확률분포를 induce하게 됨
2. 이제 수업 시간에 예를 든 mixed strategy 를 생각해 보자. 수
업 시간에 설명한 방식대로 풀어보면 위와 같은 논리로 , ,
를 얻게 됨. 따라서 두 개의 서로 다른 mixed strategy 과 에 하나의
behavior strategy가 대응되는 1대1의 관계가 성림하지 않는 (many to one) 예가 됨. (수업
시간에 어떤 학생의 질문에 대한 대답임)
N
1. 어떤 과점시장에 N개의 잠재적 기업이 있다. 시장수요함수는 P A qi 이며
i 1
1
Pi Ai Qi (단 A1 A2 는 둘 상수, Qi hi e j 임) 이라 하자. 당연히 국가의
2
6. 두 경기자가 용의자의 딜레마 게임을 무한 반복해서 경기한다고 하자. (단, F>3는 상수)
Coop Fink
Coop 3, 3 0, F
Fink F, 0 1, 1
모범답안
1.
(1) 경기자-i의 극대화 문제는 max qi
ui A q j qi (qi ) 2 F 이다. 제1계조건을 구하
j
1
여 정리하면 경기자-i의 최선응수상응 qi A q j 이 도출된다. 대칭성에 의해 모든 qi를
4 j i
A 2 A2
똑같이 놓고 풀면 개별기업 생산량은 qi 이며 개별기업 이윤은 ui F 로 일
N 3 ( N 3) 2
단 구해진다. 이렇게 구한 이윤이 양(+)수라면 N개의 기업이 모두 조업을 하는 내쉬균형이 성립하
겠으나, 만약 음(-)수라면 일부 기업만 조업하고 나머지 기업은 퇴출될 것이다. 이러한 아이디어에
2 A2
F 0 혹은 N A 2
3
( N 3) 2 f
결국 내쉬균형에서 N*개의 기업은 산업에 남아서 조업을 하고 나머지 (N-N*)개의 기업은 퇴출하
A 2 A2
게 된다. 이 때 생존기업의 생산량은 qi * 이고 생존기업의 이윤은 u * F
N* 3 ( N * 3) 2
i
이다.
3
(2) 결합이윤은 모든 기업의 이윤을 더한 것이므로 카르텔의 최적화 문제는
max U u j A q j q j (q j ) 2 NF
( q1 ,, q N )
j j j j
제1계조건(기업-i의 생산량 qi에 대하여 편미분하여 0으로 놓은 식)을 구하면 최선응수상응
1
qi A 2 q j 이 도출된다. 대칭성에 의해 모든 qi를 똑같이 놓고 풀면 개별기업
4 j i
A A2
생산량은 qi 이며 결합이윤은 U N F 로 일단 구해진다. 이렇게 구한
2( N 1) 4( N 1)
이윤이 양(+)수라면 N개의 기업이 담합하는 상황이 성립하겠으나, 만약 음(-)수라면 심지어 독점산
A2 A A2
만약 F 이라면, qˆi 이며 uˆi F
4( N 1) 2( N 1) 4( N 1)
A2
만약 F 이라면, qˆi 0 이며 uˆi 0 .
4( N 1)
2 A2
F 이고, 위의 (2)에 의하여 완전담합에서 N개의 기업이 모두 조업할 조건은
( N 3) 2
A2 A2 2 A2
F 이다. 한편 은 언제나 성립함을 쉽게 보일 수 있다. 결론적으로
4( N 1) 4( N 1) ( N 3) 2
초기장치비용 F가 아래 부등식의 범위에 있으면 된다.
A2 2 A2
F
4( N 1) ( N 3) 2
만약 장치비용 F가 지나치게 크면 완전담합 하에서도 손실이 발생하여 아무도 생산에 참여하지
2.
4
<Case i> x1 m, x2 m
어떤 경우에도 후보2가 전략을 바꿀 유인이 존재함. 좀 더 구체적으로
3.
각각 다음과 같이 구해진다.
1 1 1
Pi Autarky Ai , uiAutarky ( Ai ) 2 , CSiAutarky ( Ai ) 2
2 4 8
1 1 2
Pi LF Ai , uiLF ( A1 ) 2 ( A2 ) 2 , CSiAutarky ( Ai ) 2
3 9 9
(3) 폐쇄경제체제에서 완전개방체제로 이행함에 따라 나타나는 효과는 다음과 같다.첫째, 대국이나
5
소국 할 것 없이 가격은 하락하고 소비자잉여는 증가한다.
둘째, 대국의 독점기업의 이윤은 적어지고 소국의 독점기업의 이윤은 두 시장의 상대적인 크
A2 5
만약 (즉, 대국과 소국이 규모에서 큰 차이가 없으면), 소국의 독점기업 이윤도 낮아진
A1 2
A2 5
다. 반면 만약 (즉, 대국의 시장규모가 상대적으로 훨씬 크면), 소국의 독점기업 이윤은
A1 2
높아진다.
셋째, 소국의 사회후생은 언제나 상승하나 대국의 사회후생은 두 국가의 상대적 규모에 따라
A2 2 6
증가할 수도 있고 감소할 수도 있다. 구체적으로 만약 (즉, 대국과 소국의 규모가 상
A1 3
A2 2 6
대적으로 엇비슷하면), 대국의 사회후생도 증가한다. 그러나 만약 (즉, 대국의 시장규
A1 3
3 1 1
Wi Autarky ( Ai ) 2 에서 Wi LF ( Ai ) 2 ( Aj ) 2 으로 변함에 유의하라.
8 3 9
4.
10
다. 그런데 수락할 경우 m1 m2 10 이라는 사실에 착안하면, 경기자2는 m1 이면 수락
1 c
하고 그렇지 않으면 거부할 것임을 계산할 수 있다. 이제 전체게임으로 거슬러 올라가면 부분게
10 10c
임완전균형에서 경기자1이 , 를 제안할 것임을 알 수 있다.
1 c 1 c
(3) 매개변수 c가 0에 가까우면 부분게임완전균형은 (10,0)에 근접하고 반대로 1에 가까우면 (5,5)
를 얻게 된다.
6
5. Problem Set에서 똑 같은 문제 출제.
(1) 간단
(3) 투자자는 1억원을 전부 신탁하고 2억원의 투자수입이 발생하면 수탁자는 자신이 0과 1사이의
도 최적상태임.
(4) 신탁회사의 도덕적 해이, 그로 인하여 사회적으로 열악한 자원배분이 균형현상으로 관찰, 개인
중요성
6.
F 3
(1) 3 (1 ) F 1
F 1
F F 3
(2) 3 (1 )( F 0 F )
2
1 3
F 2
(3) 무자비촉발전략:
F 1
F 2
Tit-for-tat 전략:
2
7
게임이론과 응용
연세대학교 경제학부 2008년 봄학기
교수 김영세 학기말시험
Left Right
P2
Up Down Up Down
5, 0 -1, -2 5, 0 -3, -5
Left Right
P2
Up Down Up Down
5, 0 -2, 2 4, 0 -3, -5
1
2. [20점] 어떤 회사가 근로자와 고용계약을 맺으려고 한다. 근로자가 외부에서 벌 수 있는
유보임금은 W이며 근로자가 떠날 경우 이 회사의 이윤은 0이다. 근로계약 체결 후 근로
자가 열심히 일하면 H단위의 총 수입이 생기고, 근로자가 태만하면 반-반의 확률로 H단
위의 총 수입이 생기든지 아니면 L단위의 총 수입이 생긴다. 근로자가 열심히 일할 경우
근로자는 C단위의 기회비용이 들며 태만할 경우 기회비용이 들지 않는다. (단 H>L>W>C
는 항상 성립한다.)
(1) 회사와 근로자 간의 전개형 게임을 그려라.
(2) 일회게임의 부분게임 완전균형을 구하라.
(3) 무한 반복게임에서 회사가 무자비 촉발전략(grim strategy)을 사용한다고 가정하자.
근로자의 할인인수가 δ 일 때, 실효임금(efficiency wage)과 회사의 기대이윤을 계산
하라. 매개 변수들 간의 크기에 따라 답이 달라지므로 유의하라.
2
5. [25점] 기업의 소유주가 전문경영인을 고용하였다. 전문 경영인은 최선을 다해 경영활동
을 할 수도 있고 연봉이나 받으면서 적당히 회사를 운영할 수 도 있다. 열심히 일할 경우
(Work) 전문경영인에게 드는 수고비용은 γ단위(단, 0<γ<1)이지만 태만할 경우(Shirk) 드는
수고 비용은 없다. 전문경영인이 열심히 일할 경우 총 수입 y∈[0,1]의 누적확률분포함수는
모범답안
1. (1)
Up Down
3
Up Down
Across 0,5 0,5
Left 5,0 -2,2
Right 4,0 3,-5
3, 4. 이전 기출문제 참고.
5.
(1) √w γ β Î w β γ
√w 0 β Î w β
EVhard (the principal’s expected revenue when the agent works hard)
4
= ydF y|Work β γ = β γ
EVshirk (the principal’s expected revenue when the agent shirks)
= ydF y|Shirk β = β
If EVhard ≥ EVshirk, i.e. γ 2β γ , then it is optimal to implement the agent’s working
hard. Otherwise, it is optimal to implement the agent’s shirking.
(2) max ,
EV y w y dF y|Hard
s.t.
(IC) w y dF y|Hard γ w y dF y|Shirk
(IR) w y dF y|Hard γ β
(3) 교과서 풀이 참조하여 라그랑지 극대화 문제를 풀어 제1계 조건을 구하면 다음과 같다.
|S
µ λ 1
|H
w y µ λ 1 y (FOC)
(4) 위(3)에서 구한 바
w(y)
0 y
y0 1
5
1
Max EV = ∫ [ y − w( y )]dF ( y Hard )
{ w ( y )} y0
1
s.t ( IR) ∫
y0
w( y ) dF ( y Hard ) = γ + β
1
( IC ) ∫ y0
w( y ) dF ( y Shirk ) =β
1
1 1 − (α − )
FOC w( y ) = [ μ + λ{1 − 2 y α }] for y ∈ [ y 0 ,1]
2 α
1
1 1 − (α − )
w( y ) = max{0, [ μ + λ{1 − 2 y α }] 2 }
4 α
1
f ( y Shirk ) 1 − (α − )
(5) 우도비율 = = y α , α > 1 이므로 우도비율은 y에 대해서 감소
f ( y Work ) α2