Lecture 1

Introduction and Representation of Games

1
 Agenda

– Game Theory
» History and applications
» Definitions and overview
– Representation: Extensive forms
– Strategies
– Representation: Normal forms

2
 Introduction

Game Theory and Applications

3
It’s Your Move

BY: Sarasota County Libraries (flickr)

http://creativecommons.org/licenses/by-nc-sa/2.0/deed.en

4
It’s Your Move

Source: “eBay”, ebay.com

5
Source: “The ESP Game”, http://w w w.gwap.com/gw ap/gamesPreview /espgame/

6
 THE ESP GAME
TWO-PLAYER ONLINE GAME

PARTNERS DON’T KNOW EACH OTHER

AND CAN’T COMMUNICATE

OBJECT OF THE GAME:

TYPE THE SAME WORD

THE ONLY THING IN COMMON IS

AN IMAGE

7
 THE ESP GAME
PLAYER 1 PLAYER 2

GUESSING: CAR GUESSING: BOY

GUESSING: HAT GUESSING: CAR
GUESSING: KID SUCCESS!
SUCCESS! YOU AGREE ON CAR
YOU AGREE ON CAR
PICTURE BY: anyjazz65 (flickr)
http://creativecommons.org/licenses/by/2.0/deed.en

8
 What is a game?
• A game is being played whenever people
interact with each other
– Bidding in an auction
– Pricing: amazon.com
– Adoption of a new standard
– Cuban missile crisis
• Interdependence
– One person’s behavior affect another’s well-being
• What is not a game?
– N=1: monopoly
– N= infinity: perfect competition
9
 Three Major Tensions of
Strategic Interaction

• Game theory: a theory of strategic

interaction
– Conflict
– Cooperation
• Three major tensions
– Conflict between individual and group
interests
– Strategic uncertainty
– Insufficient coordination

10
 Game Theory:
A Short History
• Cournot (1838) and Edgeworth (1881)
• Zermelo (1913): chess-like games can be
solved in a (large!) finite number of
moves
• von Neumann and Morgenstern (1944)
• Nash, Harsanyi, Selten: 1994 Nobel Prize
for solution concepts in non-cooperative
game theory
• Aumann and Schelling : 2005 Nobel Prize
for game theoretic analysis of conflict and
cooperation
11
 Noncooperative vs. Cooperative
Game Theory

• Noncooperative game theory

– Individual decision making
– Group decision making: specify procedures
leading individual decisions to group
outcomes
– Solution concepts: prescriptions and
predictions about the outcomes of games
• Cooperative game theory
– Model joint actions

12
 Applications of
Game theory
• Game theory has been applied to sociology,
economics, political science, decision theory,
law, evolutionary biology, experimental
psychology, military strategy, anthropology …

13
Representing Games

An Overview

14
 Representing Games

• A list of players
• A complete description of what players
can do
• A description of what the players know
when they act
• A specification of how player actions lead
to outcomes
• A specification of player preferences over
outcomes

15
 Extensive- and Normal-Form Games

• Two basic types of interactions

– Sequential: players make alternating moves
– Simultaneous: players act at the same time
• In most cases interactions are partly
sequential and partly simultaneous
• Can be modeled in two ways
– Extensive-form games
– Normal-form games

16
 Overview

• Games of complete information

– Normal form games: Nash equilibrium
– Extensive form games: SPNE (Subgame perfect
equilibrium)
» Static
» Repeated
• Games of incomplete information
– Normal form games: Bayesian Nash equilibrium
– Extensive form games: perfect Bayesian equilibrium

17
Representing Games

The Extensive Form

18
FootBall Game •Set of players
•CB
•L
•Set of strategies
•CB: {accept, reject}
•L: {pull, not pull}
•Sequence of actions
•Outcomes
•CB falls
•CB kicks the ball
•Nothing happens

19
Extensive Form Representation

Diagram courtesy: Dr. Tayfun

Sönmez

20
 A game tree consists of:

• A series of nodes linked in a sequence

– Non-terminal node: not an endpoint
– Terminal node: indicates that game is over
• Branches represent actions

Note: loops (i.e. cycles) are not allowed

in game trees.

21
 Two Crucial Elements of
Extensive-Form Games

• Timing of actions that players may

take
• Information they have when they
must take those actions
– Information sets

22
 Example: the Bug Game

• A tale of two films (1998)

– Disney: A bug’s life
– Dreamwork: Antz
• A model
– Set of players
» Jeffrey Katzenberg
» Michael Eisner (Disney CEO)
– Set of actions for each player, etc.

23
 Building an extensive form:
Katzenberg’s first move

Leave
K
a

Stay

Initial node

24
 Adding the production
decisions
Produce
Antz
Produce K
A Bug’s Life c
E Not
Leave
b Produce
K K Antz
Not
a d
Not
Stay

25
 Capturing lack of information
Produce
Antz
Produce
A Bug’s Life c
E Not
Leave
b Produce
K Not Antz
a d
K
Not
Stay

26
 Information Sets

• Information sets summarize a player’s

knowledge of prior moves when she must
decide
• If there are more than one nodes in an
information set, a player knows that she
is in one of the nodes in the information
set (but does not know which one)
• Information sets containing only one node
are referred to as singletons

27
 Adding terminal nodes
Release
early f
Produce K
Antz e
Produce g
A Bug’s Life Not
c
E Not h
Leave
b Produce
K Not Antz l
a d
K
Not Terminal modes
Stay m
n
Initial node

28
 The Full Extensive Form
Release
early 40,110
Produce K
Antz e
Produce
A Bug’s Life Not 13,120
c
E Not 0,140
Leave
b Produce
K Not Antz 80,0
a d
K
Not
Stay 0,0
35,100

29
 A more compact representation
40,110
K R
P
N’ 13,120
P
E N 0,140
L
K N P 80,0
K
S N
0,0
35,100

Labeling branches:
-Differentiate between N and N’
-Conformity within an information set 30
 Example: Cuban Missile Crisis

• Why did the Soviet Union attempt to

place offensive missiles in Cuba?
• Why did US respond with a blockade
of Cuba?
• Why did the Soviet Union decide to
withdraw the missiles?

31
 A Simple Model of the Contest

• Set of players • Preferences

– Challenger: player CH – Challenger
– Defender: player D (best to worst)
» Concession
» Status quo
» Back down
» war
– Defender
» Backdown
» Status quo
» Concession
» war

32
Diagram courtesy: Dr. Tayfun
Sönmez

33
 Adding Uncertainty

• If there is uncertainty, we model this

by adding Nature (or Chance) as
another player
– It does not have payoffs
– It chooses different types
• Example: two types of Defenders
– Resolute type: prefers War to Concession
– Irresolute type: prefers Concession to War

34
If Challenger can observe Defender’s type

Diagram courtesy: Dr. Tayfun

Sönmez
35
If Challenger can’t observe Defender’s type:

Diagram courtesy: Dr. Tayfun

Sönmez

36
 Example: Rock, Paper, Scissors

• Simultaneous move game

• Normal-form representation:

Diagram courtesy: Dr. Tayfun

Sönmez

37
 Rock, Paper, Scissors:
Extensive Forms
• Sequential moves • Simultaneous moves

Diagrams courtesy: Dr. Tayfun Sönmez 38

What if 2 can observe if 1 chooses
Rock, but not otherwise?

Diagram courtesy: Dr. Tayfun

Sönmez 39
 Example: The Truth Game
• An uneven coin: Heads 80% of the times
• Two players: 1 and 2
• Player 1 flips the coin and observes the
results
• Player 1 announces H or T
• Player 2 hears 1’s announcement but
cannot observe results of the actual coin
flip. 2 announces h or t
• Payoffs
– 2 receives $10 if answer is true, $0 otherwise
– 1 receives $20 if 2 announces heads, and an
additional $10 if 1 tells the truth about the coin flip

40
 Representation of the Truth Game

Diagram courtesy: Dr. Tayfun

Sönmez

Payoffs
• 2 receives $10 if answer is true, $0 otherwise
• 1 receives $20 if 2 announces heads, and an additional $10 if 1
tells the truth 41
 Example: Advertising/Exit
a Exit 1-a, 0
(a) 2 observes 1
1’s actions: 2
Stay
in
a-a^2, 1/4-a/2

(b) 2 does not observe

1’s actions: a Exit 1-a, 0
1
2
Stay
in a-a^2, 1/4-a/2

Firm 1: how much to spend on advertising, [0, $1 million]

42
 Example: Ultimatum Bargaining
p Yes p , 100-p
1
2
No
0, 0

Player 1 wishes to sell a painting to player 2.

Painting is worth nothing to player 1, 100 to player 2.
Seller makes a take-it-or-leave-it offer.
If buyer accepts the price, trade at this price.
Otherwise, both parties obtain nothing.
43
 Definition: an n-person
extensive form game consists of:
• A finite game tree composed of nodes and
branches
• A division of nodes over players, chance, and
endpoints
• Probability distribution for each chance move
• A division of each player’s nodes into
information sets
• A set of outcomes and an outcome to each
endpoint
• A payoff (or utility) function for each player
over all outcomes
All this is common knowledge to all players
44
Strategies

45
 Strategy: Definition

• A strategy is a complete contingent

plan for a player in the game
– Complete contingent: describes what she will
do at each of her information sets
• Writing strategies for a player i:
– Find every information set for player i
– At each information set, find all actions
– Find all combinations of actions at these
information sets

46
Example: Exit Decisions
3, 3
(1 info set per player) A
2
A
1 4, 2
P
2, 4
A
O P
P
2, 2
0, 4

Firm 1: Aggressive (A), Passive (P) or Out (O)

Firm 2: Aggressive (A) or Passive (P)

Strategy Sets:
Firm 1: S1={A, P, O}
Firm 2: S2={A, P}
47
 Exercise: finding strategies
1. Find number of Information sets for Players 1 and 2;
2. Find number of actions at each information set;
3. Write down the strategy set for each player.

1 I 2 I 1 A
4, 2

O O B

2, 2 1, 3 3, 4

48
More Exercises: 9, 2, 5
3 R
2 A 2, 4, 4
T
U 0, 5, 4
1 3 P
(a) B
Q 3, 0, 0

2 P 2, 2, 2 S1={U,D}
D C
Q 1, 2, 2 S2={AC,AE,BC,BE}
E 6, 3, 2 S3={RP,RQ,TP,TQ}

2, 5
2 X
A Y 5, 2
(b) 1 B X 5, 2 S1={AW,BW,CW,AZ,BZ,CZ}
Y 2, 5 S2={X,Y}
C 1
W 2, 2
Z 3, 3

49
Representing Games

The Normal Form

50
 The Normal (Strategic) Form

• A game in normal form consists of

– A set of players, {1, 2, …, n}
– Strategy spaces for the players, S1, S2, …, Sn
– Payoff functions for the players, u1, u2, …, un
• Compared to the extensive form,
normal form can be
– More compact
– For each extensive form, there exists an
equivalent normal form representation

51
 Classic Normal-Form Games
• Example: Prisoners’ Dilemma
– Set of players: N = {Conductor, Tchaikovsky}
– Timing: simultaneous move
– Set of strategies: Si = {Confess, Not Confess}
– Set of payoffs:
» If one confesses, the other does not: 0, 15
years in jail
» If both confess: each gets 5 years in jail
» If neither confess: each gets 1 year in jail

52
Write down the extensive form
representation

53
 Example: Prisoners’ Dilemma
Tchaikovsky

Confess Not Confess

Confess -5, -5 0, -15

Conductor

Not Confess -15, 0 -1, -1

54
 Classical Games: Matching Pennies

2 H T
1
1, -1 -1, 1
H

T
-1, 1 1, -1

Zero-sum game: sum of payoffs in each cell is zero

55
 Classic Game: Coordination

2 A B
1
1, 1 0, 0
A

B
0, 0 1, 1

Coordination: want to use the same strategy, (A, A) or (B, B)

56
 Classic Game: Pareto Coordination
2 A B
1
2, 2 0, 0
A

B
0, 0 1, 1

Coordination: want to select the same strategy;

Prefer to coordinate on A rather than on B.

57
 Classic Game: Battle of the Sexes
2 Opera Movie
1
2, 1 0, 0
Opera

Movie
0, 0 1, 2

Coordination game: want to go to an event together,

with slightly different preferences

58
 Classic Game: Hawk-Dove/Chicken
2 H D
1
0, 0 3, 1
H

D
1, 3 2, 2

Coordination game: want to take different strategies

59
 Classic Game: Pigs
S P D
D
4, 2 2, 3
P

D
6, -1 0, 0

D: dominant pig
S: submissive pig

60
 Corresponding extensive and
normal forms
1, 2
A 2
1 1 C D

3, 1 A 1, 2 1, 2
C
B 2 B 3, 1 2, 4
D 2, 4

2 C 1, 2
1 A
D 1, 2

B C 3, 1

D 2, 4
61
Beliefs, Mixed Strategies,
and Expected Payoffs
Chapter 4

62
 Beliefs

• A player’s assessment about the

strategies of the others in the game
• Representing beliefs
– Probabilities
– Normal form games:
» probability distribution over the strategies
of the other players
» Example: Prisoner’s Dilemma

63
 Example: Prisoners’ Dilemma
Tchaikovsky
0.25 0.75
Confess Not Confess

Confess -5, -5 0, -15

Conductor

Not Confess -15, 0 -1, -1

Conductor’s expected payoff from “Confess”

=0.25(-5)+0.75 (0) = -1.25
64
 Example: Prisoners’ Dilemma
Tchaikovsky

Confess Not Confess

Confess -5, -5 0, -15

Conductor

Not Confess -15, 0 -1, -1

65
 Highlights

• What is a game?

• What is a strategy?

• Key concepts
– Extensive form
– Normal form

66