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Lecture 02

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b7ng.1119
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Exercises of Normal Form Games

November 26, 2022

1 Exercises
1.1 Mixed actions
Consider a game ⟨N, (Ai , ui )i∈N ⟩ and prove the following statement. If a mixed action αi ∈ ∆(Ai ) is
a best reply to all beliefs µi ∈ ∆(A−i ), then any action ai ∈ suppαi is a dominant action for player i.

1.2 Rationalizable actions


N players pick a real number a ∈ [0, 100] and the winner would be the person(s) whose choice is closest
to the 1/2 of the average of the numbers picked by all players. Model this as a strategic form game
(write down player, action sets, payoff functions) and find the rationalizable actions.

1.3 Finding NEs in finite games


1.3.1 more than two actions

player 1\player 2 A B C D
a 4,4 3,3 3,5 3,2
b 3,5 5,2 2,3 4,1
c 2,3 4,5 5,4 5,2
d 1,2 2,4 1,3 2,5

1.3.2 more than two players

player 1:a
player 2/player 3 a b c
a 1,2,1 2,3,1 1,1,2
b 2,1,2 1,2,2 2,1,1
c 1,2,1 2,1,3 1,2,2
player 1:b
player 2/player 3 a b c
a 2,1,2 3,2,2 2,3,1
b 3,2,1 2,1,3 3,2,2
c 2,3,2 3,2,1 2,3,1
player 1:c
player 2/player 3 a b c
a 1,3,2 2,1,3 3,2,1
b 2,1,3 3,2,1 1,1,2
c 3,2,2 1,3,2 2,2,1

1
1.4 Continuous action space
1.4.1 Oligopolies
Consider a market where there are n oligopolies. The market demand function is

P (Q) = a − bQ
Pn
where Q = i=1 qi . Assume that marginal cost c is constant and the same to each firm.
• Cournot model: firms choose quantity of output, qi , and price is determined by demand

πi (qi , q−i ) = P (Q)qi − cqi

– Solving the system of best-reply equations

• Bertrand model: firms choose price and quantity is determined by demand, let p∗ = min{pi : i ∈
N} ( ∗
(p −c)(a/b−p∗ /b)
♯{i′ ∈N :pi′ =p∗ } pi = p∗ ,
πi (pi , p−i ) =
0 pi > p∗ .

– Arguement based on economic intuition


– Consider what if there are two firms with different marginal costs?

1.4.2 Auction
• First, we analyze first-price sealed auctions.
– Bidders (players) cast their bid without seeing the other’s
– The highest bidder wins the object and pays her own bid
– Two players: bidder 1 and 2, i.e. N = {1, 2}, whose valuation of the object is vi and it is
commonly known with v1 > v2 .
– In case of a tie, the object is awarded to player 1.
– Action sets: A1 = A2 = R+ ; any positive number bi can be chosen as i’s bid.
– Assuming utility is monetary value:
( (
v1 − b1 , if b1 ≥ b2 v2 − b2 , if b2 > b1
u1 (b1 , b2 ) = u2 (b1 , b2 ) =
0, otherwise 0, otherwise

– Solution by proving the following claims


∗ In any Nash equilibrium player 1 wins the object; in other word, b∗1 ≥ b∗2 in a NE
(b∗1 , b∗1 ).
∗ In a Nash equilibrium (b∗1 , b∗1 ), it must be that b∗1 = b∗2 ; in other words, b∗1 > b∗2 cannot
hold.
∗ Neither b∗1 < v2 nor b∗1 > v1 can hold in an equilibirum.
∗ Verify that any (b∗1 , b∗1 ) such that v2 ≤ b∗1 = b∗2 ≤ v1 is a NE of this game.
∗ Remark: b2 > v2 is weakly dominated.
• Now, we analyze another form of auction: the second-price sealed auction.
– Two bidders: 1 and 2, i.e. N = {1, 2}, whose valuation of the object is vi and it is commonly
known. They cast their bid without seeing the other’s.

2
– The highest bidder wins the object and pays the second-highest bid, i.e. her opponent’s bid
in this case. In case of a tie, the object is awarded to player 1.
– Action sets: A1 = A2 = R+ ; any positive number bi can be chosen as i’s bid.
– Assuming utility is monetary value:
( (
v1 − b2 , if b1 ≥ b2 v2 − b1 , if b2 > b1
u1 (b1 , b2 ) = u2 (b1 , b2 ) =
0, otherwise 0, otherwise

– Claim: bi = vi is a weakly dominant strategy.

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