Game Theory Assignment 1

Mohammad Aman Alimy Zada

February 2024

1 Question
• To see if there is a strictly dominated strategy for the player one (the row player), we need to consider
the entire payoff matrix.

Table 1: Two Player Game Payoff Matrix

a b c
A (1, 0) (3, 0) (2, 1)
B (3, 1) (0, 1) (1, 2)
C (2, 1) (1, 6) (0, 2)

Observing the entire payoff matrix and comparing available strategies for player 1 (the row player) against
each feasible strategy of player 2(the column player), we see that there is no strictly dominated strategy for
the player 1.

• Let pA , pB , and pC denote the probabilities of choosing strategies A, B, and C, respectively, with
pA + pB + pC = 1 for player 1 so that we can calculate the expected payoff of the player 1 for each of
his available strategy choices in the case of mixed extension of the game and then compare them with
the pure strategies.

Expected payoff from playing A:

E[A] = pA × 1 + pB × 3 + pC × 2 (1)

Expected payoff from playing B:

E[B] = pA × 3 + pB × 0 + pC × 1 (2)

Expected payoff from playing C:

E[C] = pA × 2 + pB × 1 + pC × 0 (3)

Upon giving any weight for pA , pB , and pC such that pA + pB + pC = 1, we come to the conclusion that none
of Player 1’s pure strategies (A, B, or C) are strictly dominated by a mixed strategy in the mixed extension
of the game. Each pure strategy of Player 1 has situations where it yields a higher expected payoff than the
mixed strategy, depending on the probabilities chosen for the mixed strategy. Therefore, none of Player 1’s
strategies are strictly dominated by a mixed strategy.

• Looking at the payoff matrix, we see that the strategy a is a strictly dominated strategy for the column
player by the two other strategies b and c.

1
 • If we carry out iterated elimination of strictly dominated strategy or go by the Nash Equilibrium
solution method (taking the best response of the player given the other player’s strategy), we shall
reach to the equilibrium (A, c) = (2, 1).

In iterated elimination of strictly dominated strategies we assume that players are rational decision-
makers who aim to optimize their payoffs. Therefore, the process assumes that players will not choose
strategies that are strictly dominated, as doing so would lead to sub-optimal outcomes. This assumption in
turns means that each player knows that their opponents are rational and will also eliminate strictly dom-
inated strategies, ensuring that players can anticipate each other’s strategies and make informed decisions
based on rational behavior.
Moreover, we take for granted that players have complete information about the payoffs associated with
each possible combination of strategies and have pure strategies (deterministic choices), not mixed strategies
while the game is of simultaneous type.

2 Question
• Let us divide the given interval (0,1) into 10 equal parts for the sake of clarity.

0 1 2 3 4 5 6 7 8 9 10

• Strategic form Game Description:

Given the two players, Shop A and Shop B, competing for customers, each player has a strategy space
consisting of choosing a location on the interval [0,1] according to which they attract the share of customers.
The payoffs for each shop depend on the locations chosen by both shops given the uniform distribution of
customers which means that there is an element of strategic interaction, and it is a game.

To depict the situation as a strategic form game, suppose x denotes the location chosen by Shop A and y
denotes the location chosen by Shop B. Also let us denote the mass of customers going to Shop A as α(x, y)
and the mass of customers going to Shop B as β(x, y).

Players: Shop A and Shop B.

Strategy Space:
• Shop A: x ∈ [0, 1]
• Shop B: y ∈ [0, 1]
Payoff Functions:
• Shop A’s payoff function: πA (x, y) = α(x, y)
• Shop B’s payoff function: πB (x, y) = β(x, y)
Game type: Each shop knows strategy is to maximize their number of customers given their uniform
distribution of but does not know the strategy chosen by the other shop, and the game is a simultaneous
game.
The strategic interaction can be represented as a matrix with the payoffs for each shop given their
strategies. Here, the payoff is the percentage of the customers they can attract by choosing their location.

2
 Table 2: The Payoff Matrix for Shop A (row player) and Shop B (column player)
0 1 2 3 4 5 6 7 8 9 10
0 (50, 50) (5, 95) (10, 90) (15, 85) (20, 80) (25, 75) (30, 70) (35, 65) (40, 60) (45, 55) (50, 50)
1 (95, 5) (50, 50) (15, 85) (20, 80) (25, 75) (30, 70) (35, 65) (40, 60) (45, 55) (50, 50) (55, 45)
2 (90, 10) (85, 15) (50, 50) (25, 75) (30, 70) (35, 65) (40, 60) (45, 55) (50, 50) (55, 45) (60, 40)
3 (85, 15) (80, 20) (75, 25) (50, 50) (35, 65) (40, 60) (45, 55) (50, 50) (55, 45) (60, 40) (65, 35)
4 (80, 20) (75, 25) (70, 30) (65, 35) (50, 50) (45, 55) (50, 50) (55, 145) (60, 40) (65, 35) (70, 30)
5 (75, 25) (70, 30) (65, 35) (60, 40) (55, 45) (50, 50) (55, 45) (60, 40) (65, 35) (70, 30) (75, 25)
6 (70, 30) (65, 35) (60, 49) (55, 45) (50, 50) (45, 55) (50, 50) (65, 35) (70, 30) (75, 25) (80, 20)
7 (65, 35) (60, 40) (55, 45) (50, 50) (45, 55) (40, 60) (35, 65) (50, 50) (75, 25) (80, 20) (85, 15)
8 (60, 40) (65, 45) (50, 50) (45, 55) (40, 60) (35, 65) (30, 70) (25, 75) (50, 50) (85, 15) (90, 10)
9 (55, 45) (50, 50) (45, 55) (40, 60) (35, 65) (30, 70) (25, 75) (20, 80) (15, 85) (50, 50) (95, 5)
10 (50, 50) (45, 55) (40, 60) (35, 65) (30, 70) (25, 75) (20, 80) (15, 85) (10, 90) (5, 95) (50, 50)

• Nash Equilibrium

To compute a Nash Equilibrium of this game, we evaluate the payoff matrix by picking up the best
response of each player, given his opponent’s strategy in the pure strategy game, and thus we realize that
(5, 5) is a Nash Equilibrium, no player has an incentive to unilaterally deviate or change his strategy given
the other player response.

• Nash Equilibrium Uniqueness

Yes, by using NE solution method (taking the best response of the player given his opponent’s strategy),
we observe that (5, 5) is the only one NE in this game with the given settings.

3 Question
To find the Nash equilibria of this game, we need to identify the strategies for each player that form a stable
outcome, where neither player has an incentive to unilaterally deviate from their chosen strategy.
In this game, each player chooses an effort level ei where i = 1, 2. The payoff for each player depends on
their own effort level, the effort level of the other player, and the parameter αi such that i = 1, 2.

• Players: We have two players, call player 1 and player 2, representing two business partners.

• Strategy Space: Each player’s strategy is to decide how much effort to put in the business partnership.

Let us denote

e1 , e2 as the effort levels chosen by Player 1 and Player 2 respectively.

c as the cost or dis-utility of effort (the same for both players).
α1 , α2 as the parameters representing the contribution of each player to the business success.

• Payoff Functions: Not only does the payoff for each player depend on their own effort level, but it
also depends on the effort level of the other player, and the parameter α representing the contribution
of each player to the business success.

3
 Let us denote:

c as the cost of effort (the same for both players).

α1 , α2 as the parameters representing the contribution of each player to the business success.

The net utility (payoff) function for each player can be written as:

For Player 1:
1
U1 (e1 , e2 ) = · (eα α2
1 · e2 ) − c · e1
1

2
For Player 2:
1
U2 (e1 , e2 ) = · (eα α2
1 · e2 ) − c · e2
1

As we can see, the net profit or utility of each partner depends on the amount of effort they both put in.
Also, there is a trade-off of each players profit when it comes to their own effort meaning that they have to
find out the optimal solutions for their efforts (the optimal strategies).

• Finding Nash Equilibria:

To find the Nash equilibria, we identify the optimal strategies (best response) for each player given the
strategies chosen by the other player.

Player 1’s Best Response:

Player 1 wants to maximize U1 with respect to e1 . Therefore, FOC gives us:

∂U1 1 1 −1
= α1 eα
1 · eα
2 −c=0
2

∂e1 2
Solving for e1 gives:
  α 1−1
c 1
e∗1 =
α1 eα
2
2

Player 2’s Best Response:

Similarly, for player 2, we maximize U2 with respect to e2 . Hence FOC:

∂U2 1 α2 −1
= α2 eα
1 · e2
1
−c=0
∂e2 2
Solving for e2 gives:
  α 1−1
c 2
e∗2 =
α2 eα
1
1

Given that α1 , α2 ∈ (0, 1) and also c > 0 are positive real numbers (R+ ), we are ensured that the
strategy pair (e∗1 , e∗2 ) is non-negative, resulting to the existence of NE. The number of NE depends on the
values assigned to the parameters α1 and α2 .