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Algorithmic Game Theory

Over the last few years, there has been explosive growth in the research done at the in-
terface of computer science, game theory, and economic theory, largely motivated by the
emergence of the Internet. Algorithmic Game Theory develops the central ideas and results
of this new and exciting area.
More than 40 of the top researchers in this field have written chapters whose topics
range from the foundations to the state of the art. This book contains an extensive treatment
of algorithms for equilibria in games and markets, computational auctions and mechanism
design, and the “price of anarchy,” as well as applications in networks, peer-to-peer systems,
security, information markets, and more.
This book will be of interest to students, researchers, and practitioners in theoretical
computer science, economics, networking, artificial intelligence, operations research, and
discrete mathematics.

Noam Nisan is a Professor in the Department of Computer Science at The Hebrew Univer-
sity of Jerusalem. His other books include Communication Complexity.

Tim Roughgarden is an Assistant Professor in the Department of Computer Science at

Stanford University. His other books include Selfish Routing and the Price of Anarchy.

Éva Tardos is a Professor in the Department of Computer Science at Cornell University.

Her other books include Algorithm Design.

Vijay V. Vazirani is a Professor in the College of Computing at the Georgia Institute of

Technology. His other books include Approximation Algorithms.
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Algorithmic Game Theory

Edited by
Noam Nisan
Hebrew University of Jerusalem

Tim Roughgarden
Stanford University

Éva Tardos
Cornell University

Vijay V. Vazirani
Georgia Institute of Technology
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cambridge university press

Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi

Cambridge University Press

32 Avenue of the Americas, New York, NY 10013-2473, USA
www.cambridge.org
Information on this title: www.cambridge.org/9780521872829

C Noam Nisan, Tim Roughgarden, Éva Tardos, Vijay V. Vazirani 2007

This publication is in copyright. Subject to statutory exception

and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without
the written permission of Cambridge University Press.

First published 2007

Printed in the United States of America

A catalog record for this book is available from the British Library.

Library of Congress Cataloging in Publication Data

Algorithmic game theory / edited by Noam Nisan . . . [et al.]; foreword
by Christos Papadimitriou.
p. cm.
Includes index.
ISBN-13: 978-0-521-87282-9 (hardback)
ISBN-10: 0-521-87282-0 (hardback)
1. Game theory. 2. Algorithms. I. Nisan, Noam. II. Title.
QA269.A43 2007
519.3–dc22 2007014231

ISBN 978-0-521-87282-9 hardback

Cambridge University Press has no responsibility for

the persistence or accuracy of URLS for external or
third-party Internet Web sites referred to in this publication
and does not guarantee that any content on such
Web sites is, or will remain, accurate or appropriate.
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Contents

Foreword page xiii

Preface xvii
Contributors xix

I Computing in Games
1 Basic Solution Concepts and Computational Issues 3
Éva Tardos and Vijay V. Vazirani
1.1 Games, Old and New 3
1.2 Games, Strategies, Costs, and Payoffs 9
1.3 Basic Solution Concepts 10
1.4 Finding Equilibria and Learning in Games 16
1.5 Refinement of Nash: Games with Turns and Subgame Perfect Equilibrium 18
1.6 Nash Equilibrium without Full Information: Bayesian Games 20
1.7 Cooperative Games 20
1.8 Markets and Their Algorithmic Issues 22
Acknowledgments 26
Bibliography 26
Exercises 26
2 The Complexity of Finding Nash Equilibria 29
Christos H. Papadimitriou
2.1 Introduction 29
2.2 Is the Nash Equilibrium Problem NP-Complete? 31
2.3 The Lemke–Howson Algorithm 33
2.4 The Class PPAD 36
2.5 Succinct Representations of Games 39
2.6 The Reduction 41
2.7 Correlated Equilibria 45
2.8 Concluding Remarks 49
Acknowledgment 50
Bibliography 50

v
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vi contents

3 Equilibrium Computation for Two-Player Games in Strategic

and Extensive Form 53
Bernhard von Stengel
3.1 Introduction 53
3.2 Bimatrix Games and the Best Response Condition 54
3.3 Equilibria via Labeled Polytopes 57
3.4 The Lemke–Howson Algorithm 61
3.5 Integer Pivoting 63
3.6 Degenerate Games 65
3.7 Extensive Games and Their Strategic Form 66
3.8 Subgame Perfect Equilibria 68
3.9 Reduced Strategic Form 69
3.10 The Sequence Form 70
3.11 Computing Equilibria with the Sequence Form 73
3.12 Further Reading 75
3.13 Discussion and Open Problems 75
Bibliography 76
Exercises 77
4 Learning, Regret Minimization, and Equilibria 79
Avrim Blum and Yishay Mansour
4.1 Introduction 79
4.2 Model and Preliminaries 81
4.3 External Regret Minimization 82
4.4 Regret Minimization and Game Theory 88
4.5 Generic Reduction from External to Swap Regret 92
4.6 The Partial Information Model 94
4.7 On Convergence of Regret-Minimizing Strategies to Nash
Equilibrium in Routing Games 96
4.8 Notes 99
Bibliography 99
Exercises 101
5 Combinatorial Algorithms for Market Equilibria 103
Vijay V. Vazirani
5.1 Introduction 103
5.2 Fisher’s Linear Case and the Eisenberg–Gale Convex Program 105
5.3 Checking If Given Prices Are Equilibrium Prices 108
5.4 Two Crucial Ingredients of the Algorithm 109
5.5 The Primal-Dual Schema in the Enhanced Setting 109
5.6 Tight Sets and the Invariant 111
5.7 Balanced Flows 111
5.8 The Main Algorithm 115
5.9 Finding Tight Sets 117
5.10 Running Time of the Algorithm 118
5.11 The Linear Case of the Arrow–Debreu Model 121
5.12 An Auction-Based Algorithm 122
5.13 Resource Allocation Markets 124
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contents vii

5.14 Algorithm for Single-Source Multiple-Sink Markets 126

5.15 Discussion and Open Problems 131
Bibliography 132
Exercises 133
6 Computation of Market Equilibria by Convex Programming 135
Bruno Codenotti and Kasturi Varadarajan
6.1 Introduction 135
6.2 Fisher Model with Homogeneous Consumers 141
6.3 Exchange Economies Satisfying WGS 142
6.4 Specific Utility Functions 148
6.5 Limitations 150
6.6 Models with Production 152
6.7 Bibliographic Notes 155
Bibliography 156
Exercises 158
7 Graphical Games 159
Michael Kearns
7.1 Introduction 159
7.2 Preliminaries 161
7.3 Computing Nash Equilibria in Tree Graphical Games 164
7.4 Graphical Games and Correlated Equilibria 169
7.5 Graphical Exchange Economies 176
7.6 Open Problems and Future Research 177
7.7 Bibliographic Notes 177
Acknowledgments 179
Bibliography 179
8 Cryptography and Game Theory 181
Yevgeniy Dodis and Tal Rabin
8.1 Cryptographic Notions and Settings 181
8.2 Game Theory Notions and Settings 187
8.3 Contrasting MPC and Games 189
8.4 Cryptographic Influences on Game Theory 191
8.5 Game Theoretic Influences on Cryptography 197
8.6 Conclusions 202
8.7 Notes 203
Acknowledgments 204
Bibliography 204

II Algorithmic Mechanism Design

9 Introduction to Mechanism Design (for Computer Scientists) 209
Noam Nisan
9.1 Introduction 209
9.2 Social Choice 211
9.3 Mechanisms with Money 216
9.4 Implementation in Dominant Strategies 222
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viii contents

9.5 Characterizations of Incentive Compatible Mechanisms 225

9.6 Bayesian–Nash Implementation 233
9.7 Further Models 238
9.8 Notes 239
Acknowledgments 240
Bibliography 241
10 Mechanism Design without Money 243
James Schummer and Rakesh V. Vohra
10.1 Introduction 243
10.2 Single-Peaked Preferences over Policies 244
10.3 House Allocation Problem 253
10.4 Stable Matchings 255
10.5 Future Directions 262
10.6 Notes and References 263
Bibliography 264
Exercises 264
11 Combinatorial Auctions 267
Liad Blumrosen and Noam Nisan
11.1 Introduction 267
11.2 The Single-Minded Case 270
11.3 Walrasian Equilibrium and the LP Relaxation 275
11.4 Bidding Languages 279
11.5 Iterative Auctions: The Query Model 283
11.6 Communication Complexity 287
11.7 Ascending Auctions 289
11.8 Bibliographic Notes 295
Acknowledgments 296
Bibliography 296
Exercises 298
12 Computationally Efficient Approximation Mechanisms 301
Ron Lavi
12.1 Introduction 301
12.2 Single-Dimensional Domains: Job Scheduling 303
12.3 Multidimensional Domains: Combinatorial Auctions 310
12.4 Impossibilities of Dominant Strategy Implementability 317
12.5 Alternative Solution Concepts 321
12.6 Bibliographic Notes 327
Bibliography 327
Exercises 328
13 Profit Maximization in Mechanism Design 331
Jason D. Hartline and Anna R. Karlin
13.1 Introduction 331
13.2 Bayesian Optimal Mechanism Design 335
13.3 Prior-Free Approximations to the Optimal Mechanism 339
13.4 Prior-Free Optimal Mechanism Design 344
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contents ix

13.5 Frugality 350

13.6 Conclusions and Other Research Directions 354
13.7 Notes 357
Bibliography 358
Exercises 360
14 Distributed Algorithmic Mechanism Design 363
Joan Feigenbaum, Michael Schapira, and Scott Shenker
14.1 Introduction 363
14.2 Two Examples of DAMD 366
14.3 Interdomain Routing 370
14.4 Conclusion and Open Problems 379
14.5 Notes 380
Acknowledgments 381
Bibliography 381
Exercises 383
15 Cost Sharing 385
Kamal Jain and Mohammad Mahdian
15.1 Cooperative Games and Cost Sharing 385
15.2 Core of Cost-Sharing Games 387
15.3 Group-Strategyproof Mechanisms and Cross-Monotonic
Cost-Sharing Schemes 391
15.4 Cost Sharing via the Primal-Dual Schema 394
15.5 Limitations of Cross-Monotonic Cost-Sharing Schemes 400
15.6 The Shapley Value and the Nash Bargaining Solution 402
15.7 Conclusion 405
15.8 Notes 406
Acknowledgments 408
Bibliography 408
Exercises 410
16 Online Mechanisms 411
David C. Parkes
16.1 Introduction 411
16.2 Dynamic Environments and Online MD 413
16.3 Single-Valued Online Domains 417
16.4 Bayesian Implementation in Online Domains 431
16.5 Conclusions 435
16.6 Notes 436
Acknowledgments 437
Bibliography 437
Exercises 439

III Quantifying the Inefficiency of Equilibria

17 Introduction to the Inefficiency of Equilibria 443
Tim Roughgarden and Éva Tardos
17.1 Introduction 443
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x contents

17.2 Fundamental Network Examples 446

17.3 Inefficiency of Equilibria as a Design Metric 454
17.4 Notes 456
Bibliography 457
Exercises 459
18 Routing Games 461
Tim Roughgarden
18.1 Introduction 461
18.2 Models and Examples 462
18.3 Existence, Uniqueness, and Potential Functions 468
18.4 The Price of Anarchy of Selfish Routing 472
18.5 Reducing the Price of Anarchy 478
18.6 Notes 480
Bibliography 483
Exercises 484
19 Network Formation Games and the Potential Function Method 487
Éva Tardos and Tom Wexler
19.1 Introduction 487
19.2 The Local Connection Game 489
19.3 Potential Games and a Global Connection Game 494
19.4 Facility Location 502
19.5 Notes 506
Acknowledgments 511
Bibliography 511
Exercises 513
20 Selfish Load Balancing 517
Berthold Vöcking
20.1 Introduction 517
20.2 Pure Equilibria for Identical Machines 522
20.3 Pure Equilibria for Uniformly Related Machines 524
20.4 Mixed Equilibria on Identical Machines 529
20.5 Mixed Equilibria on Uniformly Related Machines 533
20.6 Summary and Discussion 537
20.7 Bibliographic Notes 538
Bibliography 540
Exercises 542
21 The Price of Anarchy and the Design of Scalable Resource
Allocation Mechanisms 543
Ramesh Johari
21.1 Introduction 543
21.2 The Proportional Allocation Mechanism 544
21.3 A Characterization Theorem 551
21.4 The Vickrey–Clarke–Groves Approach 559
21.5 Chapter Summary and Further Directions 564
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contents xi

21.6 Notes 565

Bibliography 566
Exercises 567

IV Additional Topics
22 Incentives and Pricing in Communications Networks 571
Asuman Ozdaglar and R. Srikant
22.1 Large Networks – Competitive Models 572
22.2 Pricing and Resource Allocation – Game Theoretic Models 578
22.3 Alternative Pricing and Incentive Approaches 587
Bibliography 590
23 Incentives in Peer-to-Peer Systems 593
Moshe Babaioff, John Chuang, and Michal Feldman
23.1 Introduction 593
23.2 The p2p File-Sharing Game 594
23.3 Reputation 596
23.4 A Barter-Based System: BitTorrent 600
23.5 Currency 601
23.6 Hidden Actions in p2p Systems 602
23.7 Conclusion 608
23.8 Bibliographic Notes 608
Bibliography 609
Exercises 610
24 Cascading Behavior in Networks: Algorithmic and Economic Issues 613
Jon Kleinberg
24.1 Introduction 613
24.2 A First Model: Networked Coordination Games 614
24.3 More General Models of Social Contagion 618
24.4 Finding Influential Sets of Nodes 622
24.5 Empirical Studies of Cascades in Online Data 627
24.6 Notes and Further Reading 630
Bibliography 631
Exercises 632
25 Incentives and Information Security 633
Ross Anderson, Tyler Moore, Shishir Nagaraja, and Andy Ozment
25.1 Introduction 633
25.2 Misaligned Incentives 634
25.3 Informational Asymmetries 636
25.4 The Economics of Censorship Resistance 640
25.5 Complex Networks and Topology 643
25.6 Conclusion 646
25.7 Notes 647
Bibliography 648
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xii contents

26 Computational Aspects of Prediction Markets 651

David M. Pennock and Rahul Sami
26.1 Introduction: What Is a Prediction Market? 651
26.2 Background 652
26.3 Combinatorial Prediction Markets 657
26.4 Automated Market Makers 662
26.5 Distributed Computation through Markets 665
26.6 Open Questions 670
26.7 Bibliographic Notes 671
Acknowledgments 672
Bibliography 672
Exercises 674
27 Manipulation-Resistant Reputation Systems 677
Eric Friedman, Paul Resnick, and Rahul Sami
27.1 Introduction: Why Are Reputation Systems Important? 677
27.2 The Effect of Reputations 680
27.3 Whitewashing 682
27.4 Eliciting Effort and Honest Feedback 683
27.5 Reputations Based on Transitive Trust 689
27.6 Conclusion and Extensions 693
27.7 Bibliographic Notes 694
Bibliography 695
Exercises 696
28 Sponsored Search Auctions 699
Sébastien Lahaie, David M. Pennock, Amin Saberi, and Rakesh V. Vohra
28.1 Introduction 699
28.2 Existing Models and Mechanisms 701
28.3 A Static Model 702
28.4 Dynamic Aspects 707
28.5 Open Questions 711
28.6 Bibliographic Notes 712
Bibliography 713
Exercises 715
29 Computational Evolutionary Game Theory 717
Siddharth Suri
29.1 Evolutionary Game Theory 717
29.2 The Computational Complexity of Evolutionarily Stable Strategies 720
29.3 Evolutionary Dynamics Applied to Selfish Routing 723
29.4 Evolutionary Game Theory over Graphs 728
29.5 Future Work 733
29.6 Notes 733
Acknowledgments 734
Bibliography 734
Exercises 735

Index 737
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Foreword

As the Second World War was coming to its end, John von Neumann, arguably the
foremost mathematician of that time, was busy initiating two intellectual currents that
would shape the rest of the twentieth century: game theory and algorithms. In 1944 (16
years after the minmax theorem) he published, with Oscar Morgenstern, his Games
and Economic Behavior, thus founding not only game theory but also utility theory and
microeconomics. Two years later he wrote his draft report on the EDVAC, inaugurating
the era of the digital computer and its software and its algorithms. Von Neumann wrote
in 1952 the first paper in which a polynomial algorithm was hailed as a meaningful
advance. And, he was the recipient, shortly before his early death four years later, of
Gödel’s letter in which the P vs. NP question was first discussed.
Could von Neumann have anticipated that his twin creations would converge half
a century later? He was certainly far ahead of his contemporaries in his conception
of computation as something dynamic, ubiquitous, and enmeshed in society, almost
organic – witness his self-reproducing automata, his fault-tolerant network design, and
his prediction that computing technology will advance in lock-step with the economy
(for which he had already postulated exponential growth in his 1937 Vienna Colloquium
paper). But I doubt that von Neumann could have dreamed anything close to the Internet,
the ubiquitous and quintessentially organic computational artifact that emerged after
the end of the Cold War (a war, incidentally, of which von Neumann was an early
soldier and possible casualty, and that was, fortunately, fought mostly with game
theory and decided by technological superiority – essentially by algorithms – instead
of the thermonuclear devices that were von Neumann’s parting gift to humanity).
The Internet turned the tables on students of both markets and computation. It
transformed, informed, and accelerated markets, while creating new and theretofore
unimaginable kinds of markets – in addition to being itself, in important ways, a market.
Algorithms became the natural environment and default platform of strategic decision
making. On the other hand, the Internet was the first computational artifact that was not
created by a single entity (engineer, design team, or company), but emerged from the
strategic interaction of many. Computer scientists were for the first time faced with an
object that they had to feel with the same bewildered awe with which economists have
xiii
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xiv foreword

always approached the market. And, quite predictably, they turned to game theory for
inspiration – in the words of Scott Shenker, a pioneer of this way of thinking who has
contributed to this volume, “the Internet is an equilibrium, we just have to identify the
game.” A fascinating fusion of ideas from both fields – game theory and algorithms –
came into being and was used productively in the effort to illuminate the mysteries of
the Internet. It has come to be called algorithmic game theory.
The chapters of this book, a snapshot of algorithmic game theory at the approximate
age of ten written by a galaxy of its leading researchers, succeed brilliantly, I think, in
capturing the field’s excitement, breadth, accomplishment, and promise. The first few
chapters recount the ways in which the new field has come to grips with perhaps the
most fundamental cultural incongruity between algorithms and game theory: the latter
predicts the agents’ equilibrium behavior typically with no regard to the ways in which
such a state will be reached – a consideration that would be a computer scientist’s
foremost concern. Hence, algorithms for computing equilibria (Nash and correlated
equilibria in games, price equilibria for markets) have been one of algorithmic game
theory’s earliest research goals. This body of work has become a valuable contribu-
tion to the debate in economics about the validity of behavior predictions: Efficient
computability has emerged as a very desirable feature of such predictions, while com-
putational intractability sheds a shadow of implausibility on a proposed equilibrium
concept. Computational models that reflect the realities of the market and the Internet
better than the von Neumann machine are of course at a premium – there are chapters
in this book on learning algorithms as well as on distributed algorithmic mechanism
design.
The algorithmic nature of mechanism design is even more immediate: This elegant
and well-developed subarea of game theory deals with the design of games, with players
who have unknown and private utilities, such that at the equilibrium of the designed
game the designer’s goals are attained independently of the agents’ utilities (auctions
are an important example here). This is obviously a computational problem, and in
fact some of the classical results in this area had been subtly algorithmic, albeit with
little regard to complexity considerations. Explicitly algorithmic work on mechanism
design has, in recent years, transformed the field, especially in the case of auctions
and cost sharing (for example, how to recover the cost of an Internet service from
customers who value the service by amounts known only to them) and has become the
arena of especially intense and productive cross-fertilization between game theory and
algorithms; these problems and accomplishments are recounted in the book’s second
part.
The third part of the book is dedicated to a line of investigation that has come
to be called “the price of anarchy.” Selfish rational agents reach an equilibrium. The
question arises: exactly how inefficient is this equilibrium in comparison to an idealized
situation in which the agents would strive to collaborate selflessly with the common
goal of minimizing total cost? The ratio of these quantities (the cost of an equilibrium
over the optimum cost) has been estimated successfully in various Internet-related
setups, and it is often found that “anarchy” is not nearly as expensive as one might have
feared. For example, in one celebrated case related to routing with linear delays and
explained in the “routing games” chapter, the overhead of anarchy is at most 33% over
the optimum solution – in the context of the Internet such a ratio is rather insignificant
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foreword xv

and quickly absorbed by its rapid growth. Viewed in the context of the historical
development of research in algorithms, this line of investigation could be called “the
third compromise.” The realization that optimization problems are intractable led us to
approximation algorithms; the unavailability of information about the future, or the lack
of coordination between distributed decision makers, brought us online algorithms; the
price of anarchy is the result of one further obstacle: now the distributed decision makers
have different objective functions. Incidentally, it is rather surprising that economists
had not studied this aspect of strategic behavior before the advent of the Internet. One
explanation may be that, for economists, the ideal optimum was never an available
option; in contrast, computer scientists are still looking back with nostalgia to the
good old days when artifacts and processes could be optimized exactly. Finally, the
chapters on “additional topics” that conclude the book (e.g., on peer-to-peer systems
and information markets) amply demonstrate the young area’s impressive breadth,
reach, diversity, and scope.
Books – a glorious human tradition apparently spared by the advent of the Internet –
have a way of marking and focusing a field, of accelerating its development. Seven
years after the publication of The Theory of Games, Nash was proving his theorem on
the existence of equilibria; only time will tell how this volume will sway the path of
algorithmic game theory.

Paris, February 2007 Christos H. Papadimitriou

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