ECON 201:
GAMES AND STRATEGIES
SIMULTANEOUS - MOVE GAMES
PART 2
Strict Nash Equilibrium
• Definition: a strict Nash Equilibrium of the game
G = ( N , (S1,…,Sn) , (u1,…,un) )
• is a strategy profile (s1*,…,sn*) such that for every player i in N,
ui( si* , s-i* ) > ui( si , s-i* )
• for every si in Si different than si* .
Two firms (duopolists), choosing prices
Firm 2
Low High
600, 600 1200, -200
Low
Firm 1
-200, 1200 1000, 1000
High
Best Response Analysis
• The best response correspondence of agent i: Bi(.)
for each strategy profile of the other agents, s-i,
Bi(s-i) is the set of agent i’s strategies that maximize his payoff
i.e. the set of agent i’s best responses to s-i
• Bi( s-i ) = { si* in Si such that
ui ( si* , s-i ) ≥ ui ( si , s-i )
for all si in Si }
• Typically, there are several best responses and Bi( s-i ) is a set.
• In some games however, there will always be a single best
response.
• Only for such games, the best response function of agent i: bi(.)
• for each strategy profile of the other agents, s-i,
bi(s-i) is the strategy of agent i that uniquely maximizes his
payoff
• i.e., the unique best response of agent i to s-i
• bi(s-i)= si* in Si such that
ui ( si* , s-i ) > ui ( si , s-i )
for all si in Si
• Remember the Definition:
• A Nash Equilibrium of the game
• G = ( N , (S1,…,Sn) , (u1,…,un) )
• is a strategy profile (s1*,…,sn*) such that for every player i in N,
• ui( si* , s-i* ) ≥ ui( si , s-i* )
• for every si in Si.
• New (equivalent) Definition:
• A Nash Equilibrium of the game
• G = ( N , (S1,…,Sn) , (u1,…,un) )
• is a strategy profile (s1*,…,sn*) such that for every player i in N,
• si* is in Bi(s-i* )
• If all agents’ best responses are functions,
• the definition can be written as:
• a Nash Equilibrium of the game
• G = (N , (S1,…,Sn) , (u1,…,un) )
• is a strategy profile (s1*,…,sn*) such that for every player i in N, si*=
bi(s-i* )
Application: Dividing the Money
• Players: Player 1 and 2
• Strategies: Declare how much of 4 Million TL you want
• (Player 1declares x and Player 2 declares y from {0, 1, 2, 3, 4}
• Payoffs:
if x+y ≤ 4, (x, y)
if x+y > 4 , and x < y (x, 4-x)
if x+y > 4, and x > y (4-y, y)
if x+y > 4, and x=y (2, 2)
Finding the Best Response
l r
5, 1 0, 2 Which strategy would you choose?
U
1,3 4, 1
M
4,2 2, 3
D
Finding the Best Response: Sheet 1
Finding the Best Response: Sheet 2
Penalty Kick Game
l r
4,-4 9, -9 Which strategy would you choose?
L
6, -6 6, -6
M
9, -9 4, -4
R
Penalty Kick Game: Sheet 1
Application: A Synergistic Relationship
• Players: 1 and 2
• Strategies: choose effort level ai (any nonnegative real number)
• Payoffs:
• u1 ( a1 , a2 ) = a1 ( c + a2 – a1 )
• u2 ( a1 , a2 ) = a2 ( c + a1 – a2 )
A Synergistic Relationship: Sheet 1
How to obtain the best-response functions
from the players’ payoff functions ?
• Need to take derivatives of the payoff (profit) functions and
equate them to 0.
• Need to check the second derivatives to make sure that they
are maximized.
• Check the boundaries of the strategy set as well
• In our example
u1 ( a1 , a2 ) = a1 ( c + a2 – a1 )
• The first derivative is equated to zero:
( c + a2 – a1 ) + a1 ( - 1 ) = 0
a1* = 0.5 ( c + a2 )
• Note that the second derivative is -2
• So a1* maximizes i’s payoff in response to a2
• So a1* is the best response to a2
• The best response functions:
• b1 ( a2 ) = 0.5 ( c + a2 )
• Nash equilibrium (from the graph):
• Draw the graphs of the two best response functions and check
the intersection.
The players’ best response functions for the
game
The Nash equilibrium (from calculation):
• ( a1 , a2 ) such that a1 = b1 ( a2 ) = 0.5 ( c + a2 )
a2 = b2 ( a1 ) = 0.5 ( c + a1 )
a1 = 0.5 ( c + a2 ) = 0.5 ( c + 0.5 ( c + a1 ) )
a1 = c
( a1 , a2 ) = ( c , c )
In Class Game: Partnership Game
• 2 agents own the firm jointly, share 50% of profit
• Each agent choose her effort level to put into this firm
Si= [0, 4]
Firm profit is given by 4(s1+s2+bs1s2) 0 ≤ b ≤ ¼
U1(s1, s2)=1/2[4(s1+s2+bs1s2)]-s1²
U2(s2, s1)=1/2[4(s1+s2+bs1s2)]-s2²
• Find the best response of the agents.
Partnership Game: Sheet 1
Partnership Game: Sheet 2
In Class Game: Cournot Duopoly
• Players: 2 Firms
• Strategies: Firms produce identical products , s1 and s2
• Cost of production c-s
• Prices: a=b(s1+s2)
• Find the best responses for the players.
• Find the NE of the game
Cournot Game: Sheet 1
Cournot Game: Sheet 2
