An Elementary Introduction to

Game Theory

• Ritesh Pandey
1. Strategic interaction among economic
agents :
Classical Analysis
Game Theoretic analysis

2. Uses of Game theory: Parlor Games,

Political Negotiation and
Economic behavior.
3. Our focus will be on Two - Person games
with a finite no. of strategies.

4. The Concept of a Payoff Matrix.

5. Dominant Strategy: If there is one optimal

choice of strategy for a player irrespective
of the other’s choice.

6. If a DS exists, it will be the equilibrium outcome

of the game.
 Player B

Left Right

Top 1,2 0,1

Player A

Bottom 2,1 1,0

7. Usually, dominant strategy equilibria
are not that frequent.

8.But we can be less strict.

9. A Nash Equilibrium: Rather than

require that A’s choice be optimal for all
choices of B, we can just require that it be
optimal only for optimal choices of B.
 Player B

Left Right

Top 2,1 0,0

Player A

Bottom 0,0 1,2

10. We say that a pair of strategies is a Nash equilibrium if
A’s choice is optimal given B’s choice, and B’s choice
is optimal given A’s choice.

11. Note that neither knows beforehand the other person’s choice

12. He only has a set of Expectations.

13. Problems with Nash equilibrium concept:

1. Non-unique Nash equilibria may exist.

2. No Nash equilibria may exist.

 Player B

Left Right

Top 0,0 0,-1

Player A

Bottom 1,0 -1,3

No Nash Equilibria exist here.

(Pure Strategy)
14. Of course this was a pure-strategy case.

15. We can have a mixed strategy case where each player

merely has a probability of playing a choice. For e.g.,
each could choose with a probability of 50% for either
choice and land up with an expected payoff.

16. It can be shown that for games of the kind we are

considering we can always have a Nash equilibrium.
 Player B

Confess Deny

Confess -3,-3 0,-6

Player A

Deny -6,0 -1,-1

The Prisoner’s dilemma.

( also, arms control, cheating in a cartel )
Repeated Games:
You have a chance to punish for bad behavior.

You have a chance to establish a reputation for co-operation

and thereby encouraging the other player to do the same.

Viable only when an infinite no. of rounds are allowed.

Sequential games:

One Player gets to choose first.

Scenario changes entirely in terms of equilibria.

 Player B

Left Right

Top 1,9 1,9

Player A

Bottom 0,0 2,1

 A,B
Player B 1,9
chooses Left
L
e
Player
Top f 1,9
A
chooses Right t

Left
Bottom 0,0

Player B 2,1
Right
chooses
A Game of Entry Deterrence
Entrant,Incumbent
Incumbent 1,9
Chooses Fight
L
e
Entrant
Stay f 1,9
chooses Out Don’t t
fight

Fight
Enter 0,2

Incumbent 2,1
Don’t
chooses
fight
 Column

Left Right

Top 2,1 0,0

Row

Bottom 0,0 1,2

 Girl

Action Art

Action 2,1 0,0

Boy

Art 0,0 1,2

The battle of the sexes

 Player B

Confess Deny

Confess -3,-3 0,-6

Player A

Deny -6,0 -1,-1

The prisoner’s dilemma

 USSR

Refrain Build

Refrain 4,4 1,3

US

Build 3,1 2,2

An arms race
 Boy2

Swerve Straight

Swerve 0,0 -1,1

Boy 1

Straight 1,-1 -2,-2

Chicken
 Keeper

Defend
Swerveleft Defend
Straight
right

Kick
Swerve
left 50,-50
0,0 80,-80
-1,1

Striker
Boy 1

Kick
Straight
right 90,-90
1,-1 20,-20
-2,-2

Penalty point in soccer

Games of co-existence

Evolutionary Stable Strategy(ESS)

Astonishingly, EESS equilibria are also

Nash equilibria.
 Dog 2

Hawk Dove

Hawk -2,-2 4,0

Dog 1

Dove 0,4 2,2

Hawk-Dove Game
Games of Commitment:

Till now simultaneous moves.

Now Sequential.

In such Games, the important issue is commitment.

Commitment must be
IRREVERSIBLE & OBSERVABLE
 Frog,Scorpion
Scorpion -10,5
Chooses Sting
L
e
Frog Carry
f 5,3
chooses Refraint

Refuse
0,0

The Frog & The Scorpion Story

 Frog,Scorpion
Scorpion -10,2
Chooses Sting
L
e
Frog Carry
f 5,3
chooses Refraint

Refuse
0,0

The Smart Frog & The Scorpion

 Kidnapper,Hostage
Hostage -5,5
Chooses Identify
L
e
Kidnapper Release
f 5,3
chooses Refraint

Kill
-3,-10

The Kindly Kidnapper

 Dominant Pig
Don’t press press
lever lever
Don’t
press 0,0 4,1
Subordinate lever
Pig
press
0,5 2,3
lever

When Strength is Weakness: Pigs Pressing Levers

 Younger Generation

Support Refrain

Save 3,-1 1,0

Older
Generation
Squander 2,-1 -2,-2

Savings & Social Security

 Support Old,Young
Young
-5,5
Choose L
e
Old Squander
f
5,3
choose Refraint

Support -3,-10
Save
Young
Choose
Refrain
The Savings Game:Extended Form
1,0
 Kidnapper,Hostage
Client 1300,0
Chooses Give in
L
e
Contractor Extort
f
chooses
Find a t
painter 0,-100

Charge 0,1300
actual
cost

The Hold-Up Problem