Information and Games

Spring 2011

Problem Set no.1

Game Theory

Paulo Pamplona Côrte-Real

Office 363
ppc@fe.unl.pt

João Bravo Furtado

Office 139
jfurtado@fe.unl.pt
Game theory in our lives

1. State differences and common features between the following four games. Give
some other examples of games in our daily life.

a. Matching pennies: Each of two players chooses heads or tails; if choices

match player 1 wins the penny, otherwise player 2 wins it.

b. Game of paper, stone and scissors.

c. Taking a taxi, with some more friends.

d. Buying a Vodafone, TMN or Optimus.

2. Burning Bridges: General A leads his troops to the enemies’ field. For that he
has to cross a river with only one bridge. General B (the enemy…) sees General
A burning the bridge down, as he arrives. General B is very scared now. Can
you tell why?

3. Consider the game Nim with two piles of pens. There are two players that
alternately remove some pens from one of the piles. The player that removes the
last pen wins.

a. If the two piles are balanced, for example with 3 pens each. Who will
win the game? What is the winning strategy for that player?
b. Redo the previous question but for the unbalanced case.
Dominant Strategies

4. Consider the following finite static games: Find dominant strategies and
dominant strategy equilibria. Is the game dominance solvable?

a. b.
Conf Deny Heads Tails
Conf 2,2 10,0 Heads 1,-1 -1,1
Deny 0,10 5,5 Tails -1,1 1,-1

c. d.
p st sc
Dinner Cinema p 0,0 1,-1 -1,1
Dinner 10,5 0,0 st -1,1 0,0 1,-1
Cinema 0,0 5,10 sc 1,-1 -1,1 0,0

5. Consider the following games:

A B C
D 1,0 3,1 1,1
E 1,1 3,2 0,1
F 2,2 3,3 0,2

L C R
T 4,5 1,6 5,6
M 3,5 2,5 5,4
B 2,5 2,2 7,2

a. Identify all pairs of strategies where one weakly dominates the other.
b. Do the same for strategies where one strongly dominates the other.
c. Do the games have equilibra in dominant strategies?
Iterative Elimination of Dominant Strategies (IESDS)

6. Consider the following game in strategic form

L C R
U 3,2 3,1 2,2
M 1,5 5,3 3,0
D 1,3 4,1 1,5

a) Is there an equilibrium in strictly dominant strategies?

b) Solve the game by IEWDS.
c) Solve the game by IESDS.

7. Recall the games considered in exercise 5 of the previous section, and solve
them by IEWSD. Can they be solved by IESDS?

Nash equilibrium

8. Define Nash Equilibrium and relate this equilibrium concept with the other two
concepts studied: Equilibria in dominant strategies and IESDS/IEWDS.

9. In the following normal form games, what strategies survive iterated elimination
of strictly dominated strategies? What are the pure strategy Nash equilibria?

L C R
T 2,0 1,0 4,0 L R

M 3,4 1,2 2,3 U 10,3 2,5

B 1,3 0,2 3,0 D -10,1 3,1
10. Bertrand: Two Firms compete in prices. Their demand function is D(p)= 5 - p,
and both firms’ marginal costs are c = 0. Assume that firms can only set entire
numbers as prices: 0,1,2….

a. State the game in strategic form.

b. Determine dominant and dominated strategies.
c. Find the Nash Equilibria.

11. Cournot: Two firms compete in quantities, setting quantities at the same time.
The demand is P = a - bQ. Both firms have marginal cost equal to zero.

a. What kind of game is this?

b. Can you represent it in a strategic form?
c. What are the firms’ best responses?
d. What is the Nash equilibrium?

12. Consider a market with a homogeneous product and demand given by P = 120 -
4Q. There are two firms which set quantities at the same time and both have
constant marginal costs equal to 20. Determine the Nash Equilibrium of this
game (price, quantities and profits).

13. Consider a duopoly with demand given by Q = 500 - 50P. The first firm has
marginal cost equal to 8 and the second firm has marginal cost equal to 6.
Suppose that firms compete in quantities and calculate the Nash Equilibrium of
this game (price, quantities and profits)
Mixed strategies

14. How do you define Mixed Strategy? Why would a mixed-strategy arise?

15. Find all the pure-strategy and mixed-strategy Nash equilibria of the following
game in strategic form:

L R
U 1,2 4,1
D 3,1 1,5

16. Find all the pure-strategy and mixed-strategy Nash equilibria of the following
game. (Hint: iterative elimination can be useful)

E F G H
A 1,2 1,4 1,3 3,1
B 4,3 3,1 2,1 3,0
C 3,2 2,1 1,2 5,0
D 2,2 2,1 3,3 4,0

17. Find all Nash Equilibria (pure and mixed-strategy) of the following games.

Left Right A B
Top 0,1 6,0 C 1,5 1,4
Middle 2,0 5,2 D 2,-1 0,2

18. On which side of the road do you drive? Let us consider two drivers driving in
opposite directions on the same road. Both get payoff 1 if they drive both “left”
or both “right”, otherwise very negative.
a. Model this situation as a game in strategic form and find all Nash equilibria.
b. What’s the problem with one of the equilibria? How do we deal with it in the
every day life?
Subgame Perfect Nash Equilibrium (SPNE)

19. Find all the Nash equilibria of the two following games in extensive form, and
solve them by Backward Induction to find the Subgame Perfect Equilibria.

20. Stackelberg: Two firms compete in quantities, setting quantities sequentially.

The demand is P=a-bQ. Both firms have marginal cost equal to zero.
a. How do you model this game?
b. What is the entrants’ best response?
c. Solve the game by Backward Induction.
21. An entrant E is deciding whether to enter a market in a first stage, followed by a
decision of the incumbent I to play tough or to accommodate. The entrant
simultaneously chooses between tough, accommodate or leave the market.

a. Write out all possible paths the game can take.

b. How many subgames are there? Identify them.
c. Find the Nash equilibria and Subgame-perfect Nash equilibria.

22. Consider the following game in the extensive form:

a. What are the strategies of player 1 and player 2.

b. Represent the game in the strategic form and find the Nash Equilibria in pure
strategies of the game in that form.
 c. What are the subgame perfect equilibria of the game?

23. For the following game find all the Nash Equilibria (in pure and mixed
strategies). Which of these are subgame perfect equilibria?

Repeated games

24. Why would you lend a CD to a friend but not to an unknown? Explain it using
Game Theory.

25. In duopoly would you expect collusion to be more easily sustainable if firms
compete in prices or in quantities? Why?

26. Remember prisoners’ dilemma? Here you have it again, in a strategic form:

conf deny
conf 2,2 10,0
deny 0,10 5,5

a. If this game is played a finite number of times, will there be cooperation?

b. Consider a trigger strategy for a game played infinitely. What are the conditions
for the SPE to be (deny, deny)?

27. Consider now a modified version of the prisoners’ dilemma with an additional
pure strategy Nash Equilibrium:
C N D
 C 2,2 10,0 1,-1
N 0,10 5,5 3,6
D -1,1 6,3 4,4

a. If the game is played only one time, what will be the equilibrium?
b. If the game is played, for example, ten times, what will be the equilibrium?
c. Considering a trigger strategy, what are the conditions for the SPE to be (N,N)?

28. For the following infinitely repeated game find the values of the discount factor
for which the action pairs (D,R) can be supported in an SPE using trigger
strategies that revert to Nash equilibrium.

L R
U 2,3 5,1
D 0,5 3,4

29. Consider the game that consists of the following (simultaneous) stage-game
played twice without discounting (players observe the outcome of the first
period play before playing the game for the second time).
a b C
A 6,6 2,8 0,9
B 8,2 5,5 0,0
C 9,0 0,0 1,1

a. What are the pairs of strategies that can be played in the second period in
any pure strategy subgame perfect equilibrium of this game? Why?
b. Show that there is a subgame perfect equilibrium of the game in which
players choose to play (A,a) in the first period and define the strategies
involved.
c. How does this result differ from subgame perfect equilibria of finitely
repeated games in which the stage-game has a unique Nash equilibrium?