Managerial Economics

Game Theory

Session 6

Nishant Ravi

Indian School of Business

Strategic vs Non-strategic Decision Making

Main idea:
I Non-strategic decisions: Your payoff depends on your action only
Strategic vs Non-strategic Decision Making

Main idea:
I Non-strategic decisions: Your payoff depends on your action only

I Strategic decisions: Your payoff depends on your action and the actions of
other participants in the relevant environment.
Strategic vs Non-strategic Decision Making

Main idea:
I Non-strategic decisions: Your payoff depends on your action only

I Strategic decisions: Your payoff depends on your action and the actions of
other participants in the relevant environment.

Game theory is the tool that we use to understand and predict decision making
by individuals in a strategic environment.
Constructing a Game

To analyze a strategic environment, we first need to cast it in the Game Theory

framework.
Constructing a Game

To analyze a strategic environment, we first need to cast it in the Game Theory

framework.

The framework consists of:

I A description of players
Constructing a Game

To analyze a strategic environment, we first need to cast it in the Game Theory

framework.

The framework consists of:

I A description of players

I A description of all the actions of all players.

Constructing a Game

To analyze a strategic environment, we first need to cast it in the Game Theory

framework.

The framework consists of:

I A description of players

I A description of all the actions of all players.

I The payoff of each player under all possible outcomes of the game.
Types of Games

We are going to consider two kinds of games in this course.

I Simultaneous games:

I Players move once.

I They move without the knowledge of other players’ move.

I Sequential games:

I Players may move more than once.

I They move with the knowledge of other players’ past moves.

Types of Games

Is rock-paper-scissor a simultaneous or a sequential game?

Types of Games

Is rock-paper-scissor a simultaneous or a sequential game?

Is tic-tac-toe a simultaneous or a sequential game?

We will focus on Simultaneous games today.

 Simultaneous Games

Decision making without knowledge of the

opponent’s decision
Simultaneous Games

Examples:

I Instructor chooses question for an exam on Monday; Student chooses a

preparation strategy on Tuesday. Is this a simultaneous game?
Simultaneous Games

Examples:

I Instructor chooses question for an exam on Monday; Student chooses a

preparation strategy on Tuesday. Is this a simultaneous game?

Important note:
I Timing is irrelevant.
I Only information matters.
Simultaneous Games

Examples:

I Instructor chooses question for an exam on Monday; Student chooses a

preparation strategy on Tuesday. Is this a simultaneous game?

Important note:
I Timing is irrelevant.
I Only information matters.

I Prisoner’s Dilemma: Two competing firms make pricing decisions about

their product.

I Suppose Carlsberg and Heineken are choosing their pricing strategies

without the knowledge of others choice.

I Each firm can choose a price of 6 or 4

I Their payoffs are given in the matrix in the next slide.

 Carlsberg

PC = 6 PC = 4

PH = 6 16,16 4,20
Heineken
PH = 4 20,4 12,12
 Carlsberg

Cooperate Defect

Cooperate 16,16 4,20

Heineken
Defect 20,4 12,12
 Carlsberg

Cooperate Defect

Cooperate 16,16 4,20

Heineken
Defect 20,4 12,12
 Carlsberg

Cooperate Defect

Cooperate 16,16 4,20

Heineken
Defect 20,4 12,12

Temptation over Reward

 Carlsberg

Cooperate Defect

Cooperate 16,16 4,20

Heineken
Defect 20,4 12,12
 Carlsberg

Cooperate Defect

Cooperate 16,16 4,20

Heineken
Defect 20,4 12,12

Punishment over Sucker

 Carlsberg

Cooperate Defect

Cooperate 16,16 4,20

Heineken
Defect 20,4 12,12

Carsberg defects regardless of what Heineken does

 Carlsberg

Cooperate Defect

Cooperate 16,16 4,20

Heineken
Defect 20,4 12,12

Carsberg defects regardless of what Heineken does

Heineken defects regardless of what carlsberg does
 Player 2

Cooperate Defect

Cooperate R,R S,T

Player 1
Defect T,S P,P

Temptation, Reward, Punishment, Sucker.

 Player 2

Cooperate Defect

Cooperate R,R S,T

Player 1
Defect T,S P,P

Temptation, Reward, Punishment, Sucker.

I We have
T >R>P>S
I The players always defect and get (P, P), while by cooperating they
could have achieved the win-win payoff of (R, R)
Dominant Strategy
A strategy for a player that is better than all their other strategies, regardless
of what other players play.
Dominant Strategy
A strategy for a player that is better than all their other strategies, regardless
of what other players play.

I In Prisoners’ Dilemma Defect is a dominant strategy.

Dominant Strategy
A strategy for a player that is better than all their other strategies, regardless
of what other players play.

I In Prisoners’ Dilemma Defect is a dominant strategy.

Dominated Strategy
A strategy for a player that is worse than some other strategy, regardless of
what other players play.
Dominant Strategy
A strategy for a player that is better than all their other strategies, regardless
of what other players play.

I In Prisoners’ Dilemma Defect is a dominant strategy.

Dominated Strategy
A strategy for a player that is worse than some other strategy, regardless of
what other players play.

I In Prisoners’ Dilemma Cooperate is a dominated Strategy.

Lesson 1
Always play a dominant Strategy
Lesson 1
Always play a dominant Strategy

Lesson 2
Never play a dominated Strategy
Why do we call this game Prisoners’ Dilemma?
Why do we call this game Prisoners’ Dilemma?

I Imagine two Prisoners are being interrogated separately

I Cooperate - deny the accusation, Defect - rat out the other
I Think of the payoff in terms of jail time.
T = 0, R = −1, P = −2, S = −5
Why do we call this game Prisoners’ Dilemma?

I Imagine two Prisoners are being interrogated separately

I Cooperate - deny the accusation, Defect - rat out the other
I Think of the payoff in terms of jail time.
T = 0, R = −1, P = −2, S = −5

I Result - Each Prisoner is likely rat out the other

Some examples of Prisoners’ Dilemma?
Some examples of Prisoners’ Dilemma?

I Arms Race
I Voluntary contribution to Public Good
I Tragedy of the commons
I Climate Agreement
I Collusion under Cournot Competition
I Ad war
I Why hire expensive Lawyers to settle dispute?
I Voluntary contribution to building a public facility e.g. park
Some examples of Prisoners’ Dilemma?

I Arms Race
I Voluntary contribution to Public Good
I Tragedy of the commons
I Climate Agreement
I Collusion under Cournot Competition
I Ad war
I Why hire expensive Lawyers to settle dispute?
I Voluntary contribution to building a public facility e.g. park
I Try this - Let’s not study, the Mean GPA for MGEC will be 3.3 anyway.
Classroom game: Voluntary contributions to a public park

Would people voluntarily contribute to provision of a public park (public

good)?

ISB is offering to build a new park with your contributions.

I Rules
I Each group has Rs. 50.
I You can contribute any amount X = 0, 10, 20, 30, 40 or 50 for getting the
park built.
I Your benefit from this park = Aggregate contribution=Y

I Reward
I Your reward = Money you have left over + 0.5×(Your benefit from the
park)
I That is, the reward is (50 − X ) + 0.5 × Y

For example, if there are n groups and if the i th group contributes Xi , Group 1 chooses
X1 to maximize
50 − X1 + 0.5(X1 + X2 + . . . + Xn )
Classroom game: Voluntary contributions to a public park

I Optimal Xi is 0 for each i (freeriding!). This is irrespective of what other groups

do.
Classroom game: Voluntary contributions to a public park

I Optimal Xi is 0 for each i (freeriding!). This is irrespective of what other groups

do.
I Each group gets reward of 50.
Classroom game: Voluntary contributions to a public park

I Optimal Xi is 0 for each i (freeriding!). This is irrespective of what other groups

do.
I Each group gets reward of 50.

Let’s say there are 3 groups and suppose every group contributes Rs. 50.
Classroom game: Voluntary contributions to a public park

I Optimal Xi is 0 for each i (freeriding!). This is irrespective of what other groups

do.
I Each group gets reward of 50.

Let’s say there are 3 groups and suppose every group contributes Rs. 50.

The park gets built. A group’s reward is

50 − 50 + 0.5(150) = 75
Classroom game: Voluntary contributions to a public park

I Optimal Xi is 0 for each i (freeriding!). This is irrespective of what other groups

do.
I Each group gets reward of 50.

Let’s say there are 3 groups and suppose every group contributes Rs. 50.

The park gets built. A group’s reward is

50 − 50 + 0.5(150) = 75

I Each group can be better off by contributing.

Classroom game: Voluntary contributions to a public park

I Optimal Xi is 0 for each i (freeriding!). This is irrespective of what other groups

do.
I Each group gets reward of 50.

Let’s say there are 3 groups and suppose every group contributes Rs. 50.

The park gets built. A group’s reward is

50 − 50 + 0.5(150) = 75

I Each group can be better off by contributing.

Under voluntary provision, it’s rational for every group to not contribute anything.
Dominant vs Dominated strategies

Two situations:
I You found a dominant strategy for all players.
I You found a dominated strategy for all player.

Recall that the objective is to predict what will players play. Which one would
help you more?
Dominant vs Dominated strategies

Two situations:
I You found a dominant strategy for all players.
I You found a dominated strategy for all player.

Recall that the objective is to predict what will players play. Which one would
help you more?
Dominant vs Dominated strategies

Two situations:
I You found a dominant strategy for all players.
I You found a dominated strategy for all player.

Recall that the objective is to predict what will players play. Which one would
help you more?

Reasoning
I The objective is to predict what will players play.
I Finding a dominant strategy is the answer to that!
Dominant vs Dominated strategies

Two situations:
I You found a dominant strategy for all players.
I You found a dominated strategy for all player.

Recall that the objective is to predict what will players play. Which one would
help you more?

Reasoning
I The objective is to predict what will players play.
I Finding a dominant strategy is the answer to that!
I Finding dominated strategies allows us to eliminate some possibilities. But
the prediction is not as sharp.
Dominant vs Dominated strategies

Two situations:
I You found a dominant strategy for all players.
I You found a dominated strategy for all player.

Recall that the objective is to predict what will players play. Which one would
help you more?

Reasoning
I The objective is to predict what will players play.
I Finding a dominant strategy is the answer to that!
I Finding dominated strategies allows us to eliminate some possibilities. But
the prediction is not as sharp.
I However as we will see, sometimes elimination can be very useful.
Iterated Elimination
of Dominated Strategies
Suppose that in a game, all players have a dominant strategy.

I What do we predict will happen in this game?

I All players will play their dominant strategy. Easy to predict!

But in most games, players will not have a dominant strategy.

I What do we do then?

I We look for dominated strategies and rule them out.

I let us see an example....

Consider the game between direct competitors Honda and Toyota

I Both firms are thinking about for capacity enhancements.

I Each firm can choose to

I Build a large capacity

I Build a small capacity

I Do not build any new capacity.

I Payoffs?...
 Toyota

Build Large Build Small Do Not Build

Build Large 0,0 12,8 18,9

Honda Build Small 8,12 16,16 20,15
Do Not Build 9,18 15,20 18,18

I Is there a dominant strategy?

 Toyota

Build Large Build Small Do Not Build

Build Large 0,0 12,8 18,9

Honda Build Small 8,12 16,16 20,15
Do Not Build 9,18 15,20 18,18

I Is there a dominant strategy?

I No
 Toyota

Build Large Build Small Do Not Build

Build Large 0,0 12,8 18,9

Honda Build Small 8,12 16,16 20,15
Do Not Build 9,18 15,20 18,18

I For Honda and Toyota, "Build Large" is a dominated strategy

I Eliminate the dominated strategies
 Toyota

Build Large Build Small Do Not Build

Build Large 0,0 12,8 18,9

Honda Build Small 8,12 16,16 20,15
Do Not Build 9,18 15,20 18,18

I After eliminating the dominated strategy "Build Large", it turns out that "Do
not build" is dominated by "Build small"
I Again eliminate the dominated strategies
I After iterated elimination of dominated strategies, we can say that Honda
and Toyota will "Build small"
Nash Equilibrium
I In general, a game may not be dominance solvable
I Even after iteratively eliminating the dominated strategies, we may be left
with many possible strategies.
I Or for example, in the following game we cannot eliminate any strategy for
any player.
Jill
Bowling Pool
Bowling 2,1 0,0
Jack Pool 0,0 1,2
I So, we cannot predict what outcomes may arise
I In general, a game may not be dominance solvable
I Even after iteratively eliminating the dominated strategies, we may be left
with many possible strategies.
I Or for example, in the following game we cannot eliminate any strategy for
any player.
Jill
Bowling Pool
Bowling 2,1 0,0
Jack Pool 0,0 1,2
I So, we cannot predict what outcomes may arise

I Let us take an alternative approach - instead of dominance, let us look at

best responses
Best Response
A strategy is a best response to a specific strategy of the opponent if playing
this strategy yields the highest payoff.

Jill
Bowling Pool
Bowling 2,1 0,0
Jack Pool 0,0 1,2
If Jack plays "Bowling" what is Jill’s best response to that?
I If Jill plays Bowling she gets 1. She gets 0 if she plays Pool. Therefore her
best response is Bowling
If Jill plays "Pool" what is Jack’s best response to that?
I If Jack plays Bowling he gets 0. He gets 1 if he plays Pool. Therefore his
best response is Pool.
Best Response

I Imagine that your boss asks you - "why have you played the specific
strategy?"
I The idea of Best Response is that you can justify your action. You can say
- "because I thought other players will play..."
Strategy Profile
A strategy profile is a collection that comprises of one strategy for each player.

Jill
Bowling Pool
Bowling 2,1 0,0
Jack Pool 0,0 1,2
In this game, (Bowling, Bowling) is strategy profile.

There are three more strategy profiles...

I (Bowling, Pool)
I (Pool, Bowling)
I (Pool, Pool)
Nash Equilibrium
A strategy profile is a Nash Equilibrium if every player is playing a best
response to the other players’ strategy.
Nash Equilibrium
A strategy profile is a Nash Equilibrium if every player is playing a best
response to the other players’ strategy.

There is an alternate and very useful definition...

Nash Equilibrium
A strategy profile is a Nash Equilibrium if no player has any incentive to
unilaterally deviate from it.
I Why is Nash Equilibrium an important Solution concept?
I Why is Nash Equilibrium an important Solution concept?
I Because it has the following two properties
 I Why is Nash Equilibrium an important Solution concept?
I Because it has the following two properties

No Regret
Each player is doing her best, given what others are doing.

Self fulfilling
Each player is best responding based on their beliefs about others, and these
beliefs are correct.
 Player 2

l c r

u 0,4 4,0 5,3

Player 1 m 4,0 0,4 5,3
d 3,5 3,5 6,6

I We will find the Nash Equilibria by finding the best responses.

I What is the best response of Player 1 when Player 2 plays "c"?
 Player 2

l c r

u 0,4 4,0 5,3

Player 1 m 4,0 0,4 5,3
d 3,5 3,5 6,6

I We will find the Nash Equilibria by finding the best responses.

I What is the best response of Player 1 when Player 2 plays "c"?
 Player 2

l c r

u 0,4 4,0 5,3

Player 1 m 4,0 0,4 5,3
d 3,5 3,5 6,6

I Find the Nash Equilibria

I BR of Player 1: BR1 (l) = m, BR1 (c) = u, BR1 (r ) = d
 Player 2

l c r

u 0,4 4,0 5,3

Player 1 m 4,0 0,4 5,3
d 3,5 3,5 6,6

I Find the Nash Equilibria

I BR of Player 1: BR1 (l) = m, BR1 (c) = u, BR1 (r ) = d
I BR of Player 2: BR2 (u) = l, BR2 (m) = c, BR2 (d) = r
I Nash Equilibrium - Two BR intersects: (d, r )
 Player 2

l c r

u 0,4 4,0 5,3

Player 1 m 4,0 0,4 5,3
d 3,5 3,5 6,6

I Find the Nash Equilibria

I BR of Player 1: BR1 (l) = m, BR1 (c) = u, BR1 (r ) = d
I BR of Player 2: BR2 (u) = l, BR2 (m) = c, BR2 (d) = r
I Nash Equilibrium - Two BR intersects: (d, r )
I Will the players always play their Nash Equilibrium strategy?
 Player 2

l c r

u 0,4 4,0 5,3

Player 1 m 4,0 0,4 5,3
d 3,5 3,5 6,6

I Find the Nash Equilibria

I BR of Player 1: BR1 (l) = m, BR1 (c) = u, BR1 (r ) = d
I BR of Player 2: BR2 (u) = l, BR2 (m) = c, BR2 (d) = r
I Nash Equilibrium - Two BR intersects: (d, r )
I Will the players always play their Nash Equilibrium strategy?
I Not necessarily. But consider some alternative
I Suppose, 1 plays m b/c she believes that 2 will play l, and 2 will play l b/c
she thinks that 1 will play u and so on
I Note that this is not self fulfilling
We learnt three concepts:
1. Dominant Strategies(DS)
2. Iterated elimination of Dominated Strategies (IEDS)
3. Nash equilibrium(NE)

The order in which these are listed above is also the order of their hierarchy, i.e.
I If a strategy profile is DS then it also survives IEDS and is also a NE
I If a strategy profile survives IEDS then it is a NE

Note that the reverse may not be true!

Nash Equilibrium: Multiple Equilibria

Driving on the Correct side of the road

Jill
Left Right
Left 10 , 10 -100 , -100
Jack Right -100 , -100 10 , 10
Nash Equilibrium: Multiple Equilibria

Driving on the Correct side of the road

Jill
Left Right
Left 10 , 10 -100 , -100
Jack Right -100 , -100 10 , 10

There are two Nash Equilibria!

I (Left,Left) and (Right, Right)
Nash Equilibrium: Multiple Equilibria

Crossing the Road

Driver
Drive Carefully Drive Fast
Jaywalk 5,0 -10 , -10
Pedestrian Dont Jaywalk 0,0 0 , 10
Nash Equilibrium: Multiple Equilibria

Crossing the Road

Driver
Drive Carefully Drive Fast
Jaywalk 5,0 -10 , -10
Pedestrian Dont Jaywalk 0,0 0 , 10

There are two Nash Equilibria!

I (Jaywalk, Drive Carefully) and (Dont Jaywalk, Drive Fast)
Nash Equilibrium: Multiple Equilibria

Price Match Guarantee: Is that good for the consumer?

Flipkart
High Low
High 10 , 10 0 , 20
Amazon Low 20 , 0 2,2
Nash Equilibrium: Multiple Equilibria

Price Match Guarantee: Is that good for the consumer?

Flipkart
High Low
High 10 , 10 0 , 20
Amazon Low 20 , 0 2,2
There is one Nash Equilibrium (Low,Low)
Now suppose both firms introduce price match guarantee... New game?
Nash Equilibrium: Multiple Equilibria

Price Match Guarantee: Is that good for the consumer?

Flipkart
High Low
High 10 , 10 0 , 20
Amazon Low 20 , 0 2,2
There is one Nash Equilibrium (Low,Low)
Now suppose both firms introduce price match guarantee... New game?

Flipkart
High Low
High 10 , 10 2 , 2
Amazon Low 2,2 2,2
There are two Nash Equilibria! (Low,Low) and (High, High).
Are consumers better off? Probably not.
Nash Equilibrium: Multiple Equilibria

Bank Runs: How do banks work and why are there runs on Banks?
Nash Equilibrium: Multiple Equilibria

Bank Runs: How do banks work and why are there runs on Banks?

Jill
Withdraw Not Withdraw
Withdraw 45% loss , 45% loss 10% loss , 100% loss
Jack Not Withdraw 100% loss, 10% loss 10% gain , 10% gain
Nash Equilibrium: Multiple Equilibria

Bank Runs: How do banks work and why are there runs on Banks?

Jill
Withdraw Not Withdraw
Withdraw 45% loss , 45% loss 10% loss , 100% loss
Jack Not Withdraw 100% loss, 10% loss 10% gain , 10% gain

There are two Nash Equilibria!

I (Not Withdraw, Not Withdraw) and ( Withdraw, Withdraw)
I When Banks are doing well, typically (Not Withdraw, Not Withdraw) is
played.
I When Banks are not doing well, ( Withdraw, Withdraw) may be played
leading to bank runs!
Nash Equilibrium: Model of spatial competition
Imagine there are two Amul ice-cream vendors selling only orange bars (each of
price 10 rupees) who have to decide where to place their cart in a long street
with continuous houses. The vendors want to get more customers, but the
customers choose the nearest cart. If carts are at the same location, they split
the business equally.
Nash Equilibrium: Model of spatial competition
Imagine there are two Amul ice-cream vendors selling only orange bars (each of
price 10 rupees) who have to decide where to place their cart in a long street
with continuous houses. The vendors want to get more customers, but the
customers choose the nearest cart. If carts are at the same location, they split
the business equally.

Vendor 1 Vendor 2

0 1
Figure: Model of Spatial Competition between two ice-cream vendors
Nash Equilibrium: Model of spatial competition
Imagine there are two Amul ice-cream vendors selling only orange bars (each of
price 10 rupees) who have to decide where to place their cart in a long street
with continuous houses. The vendors want to get more customers, but the
customers choose the nearest cart. If carts are at the same location, they split
the business equally.

Vendor 1 Vendor 2

0 1
Figure: Model of Spatial Competition between two ice-cream vendors

Nash Equilibrium
Vendor 1 Vendor 2
0 1
Figure: Nash Equilibrium in the above Model

The unique pure-strategy Nash equilibrium is both the vendors placing their
cart at the mid-point of the street.
Take-Aways
I Always play a dominant strategy.
I Always play a dominant strategy.

I Never play a dominated strategy.

I Always play a dominant strategy.

I Never play a dominated strategy.

I Iteratively eliminate the dominated strategies if you can

I Always play a dominant strategy.

I Never play a dominated strategy.

I Iteratively eliminate the dominated strategies if you can

I Nash Equilibrium
References
I Allen et al. Managerial Economics, Chapter 11 (Game Theory)
I Kreps Microeconomics for Managers, Chapter 21 (Noncooperative Game
Theory)
I Pindyck and Rubinfeld Microeconomics, Chapter 12 (Game Theory and
Competitive Strategy)
Practice Problems
Practice Problem 1

Two players are playing the Prisoner’s Dilemma (as you have seen in class). But the two players
are Indignant Angels in the sense that they do not like when the other cheats, but if they cheat
themselves, they cannot sleep at night because of their guilt. The payoff matrix is as follows.

Player 2

Cooperate Defect

Cooperate R,R S,T-G

Player 1
Defect T-G,S P,P

a. Assume that T > R > T − G > P > S. What are the Nash Equilibria?
b. Assume player 1 is an Indignant Angel, but player 2 is evil as usual, i.e., G = 0 for player 2. What
will be the equilibrium outcome?
Practice Problem 2

Two soap producers, the Froth Company and the Maison Company, can stress either newspapers
or magazines in their forthcoming advertising campaigns. The payoff matrix is as follows, with
each cell representing (Froth’s profits, Maison’s profits).

Maison Company

Newspapers Magazines

Froth Newspapers e8 mm, e9 mm e7 mm, e8 mm

Company Magazines e9 mm, e8 mm e8 mm, e7 mm

a. Is there a dominant strategy for each firm? If so, what is it?

b. What will be the profit of each firm?
c. Is this game an example of the prisoner’s dilemma?
Practice Problem 3

The Ulysses Corp and the Xenophon Company are the only producers of a very sophisticated type
of camera. They each can engage in either a high or low level of advertising in trade journals.
The payoff matrix is as follows:

Xenophon Co.

Low level High level

Ulysses Low level $12 mm, $13 mm $11 mm, $12 mm

Corp. High level $13 mm, $12 mm $12 mm, $11 mm

a. Will Ulysses engage in a high or a low level of advertising in trade journals?

b. Will Xenophon engage in a high or a low level of advertising in trade journals?
c. Is there a dominant strategy for each firm?
Practice Problem 4

Two firms are in the chocolate market. each can choose to go for High end market or the Low
end market. The payoff matrix is as follows.

Firm 2

High-end Low-end

High-end 50,50 100,500

Firm 1
Low-end 700,400 -20,-30

a. Is there a dominant strategy for any of the firms?

b. What are the Nash Equilibria?
c. Suppose the firms can communicate and make side payments. Which firm benefits more from
coordination? How much would that firm need to offer the other to persuade it to collude?
Practice Problem 5

Two rival bookstores are trying to locate in one of two locations. The locations are near to each
other. Each would like to avoid a bidding war against one another since that will drive up each of
their rents. Payoffs are given in the following table:

Borders

West End Downtown

Barnes and West End 10, 10 60,40

Nobles Downtown 25, 55 20, 20

Does either player have a dominant strategy to bid high for a location?
Practice Problem 6

Two major networks are competing for viewers ratings in in the 8-9 pm and 9-10 pm slots on a
given weekend. Each has two shows to fill this time and juggling its lineup. Each can choose to
put its "bigger" show first (8-9) or second (9-10). Payoffs are given in the following table:

Network 2

First second

Network 1 First 20,30 18,18

Second 15,15 30,10

a. Does either player have a dominated strategy?

b. What will be the equilibrium?
Practice Problem 7

Watch the following scene from the movie Princess Bride (Video). Formulate the problem as
articulated by Vizzini (the Sicilian). Disregard the switch made by Vizzini. Then solve for the
Nash equilibrium.
Note: The wine is from the “Bottle of Wits”.
Practice Problem 8

There are 100 players. Each player needs choose a number between 0 and 100. The player who
chooses a number closest to half of the average of the numbers that all of the players have chosen
wins the game and gets a prize of 100. Rest of the players get nothing. If it is commonly known
that all the agents are perfectly rational, then what number will they choose? Assume that if
there is more than one winner then the prize is equally divided among the winners.