Game theory is the science of rational behavior in

interactive situations. GT provides some general principles for

thinking about strategic interactions.

Strategy is of the essence. In each case below, we will

point out the crucial strategic principle.

EXAMPLES

A. Tennis - Which Passing Shot: The most important general

principle of such situations is not what Evert should do
but what she should not do: She should not do the same
thing all the time or systematically. If she did, then
Navratilova would learn to cover that shot, and Evert’s
chances of success would fall. Idea of randomness -
strategy has to be random or unsystematic.

The general idea of “mixing one’s plays”

B. The GPA Rat Race – Prisoners’ Dilemma

People often think that in every game there must be a

winner and a loser. The prisoners’ dilemma is
different—all players can come out losers. People
play, and lose, such games every day, and their losses
can range from minor inconveniences to potential
disasters.
Spectators at a sports event stand up to get a better
view, but when all stand, no one has a better view than
when they were all sitting. Superpowers acquire more
weapons to get an edge over their rivals, but when both
do so, the balance of power is unchanged.
Mutually beneficial cooperation can be achieved and
sustained.

C. “We Can’t Take the Exam Because We Had a Flat Tire”

General Principle: one should look ahead to future moves in the
game and then reason backward to calculate one’s best current
action. There may be convergence of expectations about what
should be chosen in many circumstances. Such a commonly
expected strategy on which game players can successfully
coordinate is called a focal point.

D. Why Are Professors So Mean?

Principle of commitments, and related strategies such as

threats and promises.

E. The Waiting Game: Roommates and Families on the Brink

This game of strategy can be viewed from two perspectives.

In one, each of the roommates is regarded as having a simple
binary choice—to do the shopping or not. The best outcome
for you is that someone else does the shopping and you stay
at home; the worst is that you do the shopping while the
others get to use their time better. If more than one
roommate does the shopping (unknown to one another, on the
way home from school or work), there is unnecessary
duplication and perhaps some waste of perishables; if no one
does the shopping, there can be serious inconvenience or
even disaster if the toilet paper runs out at a crucial
time.

Similar to game of chicken.

Brinkmanship - A more interesting dynamic perspective on the

same situation regards it as a war of attrition, where each
roommate tries to wait out the others, hoping that someone
else’s patience will run out first. In the meantime, the risk
escalates that the apartment will run out of something critical,
leading to serious inconvenience or a blowup. Each player lets
the risk escalate to the point of his own tolerance; the one
revealed to have the least tolerance loses. Each sees how close
to the brink of disaster the others will let the situation go.

Father and child, Employer and trade union, neighbouring

countries and war. Neither side can be fully sure of
the other’s intentions, so each side explores them through
a succession of small incremental steps, each of which
escalates the risk of mutual disaster. The daughter in our
story was exploring previously untested limits on her
freedom; the father was exploring previously untested—and
perhaps unclear even to himself—limits on his authority.
This exchange was an example of brinkmanship—a game of
escalating mutual risk—par excellence. Such games can end
in one of two ways. In the first, one of the players reaches
the limit of his own tolerance for risk and concedes. (The
father in our story conceded quickly, at the very first
step. Other fathers might be more successful
disciplinarians, and their daughters might not even initiate
a game like this.) In the second, before either player has
conceded, the risk that they both fear comes about, and the
blowup (the strike or the war) occurs. The feud in our
host’s family ended “happily”; although the father
conceded and the daughter won, a blowup would have been much
worse for both.

F. The Dating Game

Real strategic issue is manipulation of information.

When you go on a date, you want to show off the best

attributes of your personality to your date and to conceal
the worst ones. Of course, you cannot hope to conceal them
forever if the relationship progresses, but you are resolved
to improve or hope that by that stage the other person will
accept the bad things about you with the good ones. And you
know that the relationship will not progress at all unless
you make a good first impression; you won’t get a second
chance to do so.

But you know that if the other is as good at the dating game
as you are, he or she will similarly try to show the best
side and hide the worst. You will think through the
situation more carefully and try to figure out which signs
of good qualities are real and which ones can easily be put
on for the sake of making a good impression.

Strategies that convey good information about yourself are

called signals; strategies that induce others to act in ways
that will credibly reveal private information about
themselves, good or bad, are called screening devices.
Thus, the woman’s suggestion of giving up one of the
apartments was a screening device, which put the man in the
situation of either offering to give up his apartment or
revealing his lack of commitment.

THINKING ABOUT STRATEGIC GAMES

Plan:

Present some basic concepts and terms that are used

in game-theoretic analysis:
strategies,
payoffs, and
equilibrium
Describe methods of solving a game.
Provide a brief discussion of the uses of game theory.

Game theory is the study of situations in which the payoffs of one agent
depend not only on his or her actions, but also on the actions of others.
1. If neither of you confesses to having a gun during the crime, you are both
looking at jail time of 2 years for the robbery.
2. If one confesses to having a gun, the confessor goes free and the other serves
substantial jail time—10 years.
3. If both of you confess to having a gun, then jail terms will be negotiated
down to 5 years.

Three key elements of any game:

1. The players
2. The strategies: Strategies comprise a complete plan describing how a player
will act.
3. The payoffs
Let’s first identify these three key elements in this particular game:
Players: You and Josie
Strategies: Confess or hold out
Payoffs: A payoff matrix represents the payoffs for each action players can take.
Payoff Matrix Prisoners’ Dilemma

The prisoners’ dilemma illustrates several important features common to game

theory. It involves interactions among a few players (in this case, two). This
game is called a simultaneous-move game, because players select their actions
at the same time. In the prisoners’ dilemma, this implies that both you and Josie
have to pick your action simultaneously without knowing the other person’s
choice. But it is assumed that you each do know the entire payoff matrix—that
is, you each know the payoffs for both players. When constructing a payoff
matrix, it is important to understand that all relevant benefits and costs of each
action are taken into account. In this example, we assume that the
payoffs represent all relevant payoffs to this game. Thus, we are assuming that
other potentially important features, such as retribution after jail time is served,
do not influence the payoffs of this game. We are now in a position to ask the
question game theory equips us to answer: what should you do?

Best Responses and the Prisoners’ Dilemma

A best response is simply one player’s optimal strategy, taking the other
player’s strategy as given.
A good way to reason through which action you should choose—confess or
hold out—is to think about what every possible action of the other player might
be and then what your best choice will be for each of them. For
example, suppose that Josie decides to confess. In that case, your payoffs when
she chooses to hold out are no longer relevant—you should simply focus on the
situation in which she confesses.

What is your best response if Josie chooses confess? CONFESS

What is your best response if Josie chooses Not Confess (Hold Out)?
CONFESS

You now understand that no matter what you think Josie will do, you should
always confess. This means that when you are placed in such a game, you
should always choose to confess, regardless of what you think your partner will
do.

Dominant Strategies and Dominant Strategy Equilibrium

When a player has the same best response to every possible strategy of the other
player(s), then we say that the player has a dominant strategy. In the game of
Exhibit 13.1, confessing is a dominant strategy, because it is your best response
to any strategy choice of your partner.

Josie has a dominant strategy of confessing too. When a dominant strategy

exists for both players, the notion of equilibrium for the game is
straightforward. A strategy combination for the players is a dominant strategy
equilibrium if the relevant strategy for each player is a dominant strategy. In
the game above, there is a dominant strategy equilibrium: both players should
confess because confessing is a dominant strategy for each player—that is, by
confessing, they receive a higher payoff than they would buy holding out
regardless of what the other player does.
Interestingly, this equilibrium leads to an outcome that is not best for both
players. Even though both you and Josie would be better off if you both held
out, the dominant strategy equilibrium is for both of you to confess! This
situation is the heart of the paradox that we have been studying so far—the
prisoners’ dilemma.
Games without Dominant Strategies

A summary of the three key elements in this game are as follows:

Players: Hang Ten in Da Den and the La Jolla Surf Shop
Strategies: To advertise or not to advertise
Payoffs: See Exhibit 13.4
Do you have a dominant strategy in this game? No; this is because your optimal
strategy depends on what La Jolla Surf Shop chooses. Does La Jolla Surf Shop
have a dominant strategy? By similar reasoning, it also does not have a
dominant strategy. Thus there is no dominant strategy for your surf shop or for
La Jolla Surf Shop. In this case, you remain unsure as to what to do, because
your optimal choice depends on the choice of La Jolla Surf Shop. This
particular game illustrates a key concept in game theory: you don’t always have
a simple best response (a dominant strategy) that works against all strategies of
others, as you do in games with a dominant strategy, such as the prisoners’
dilemma game.

In equilibrium, no player in a game can change strategy and improve his or her
payoff. Therefore, a combination of strategies is a Nash equilibrium if each
player chooses a strategy that is a best response to the strategies of others—that
is, players are choosing strategies that are mutual best responses. What this
means is that no one can change her choice and be better off. Accordingly, the
dominant strategy equilibrium that we found in the prisoner’s dilemma game is
a Nash equilibrium. This notion of equilibrium depends on two critical factors:
(1) that all players understand the game and the payoffs associated with each
strategy (so that they will choose what is best for themselves) and (2) that all
players understand that other players understand the game.

Finding a Nash Equilibrium

The key to finding Nash equilibria in simultaneous-move games is to follow the

logic of finding best responses. Let’s return to the advertising decision. Begin
by asking yourself: if La Jolla Surf Shop advertises, what should your shop do?
As reasoned through above, your best response is to advertise. You then need to
ask: once in this cell of the payoff matrix, does either surf shop have a reason to
change its strategy? The answer is no.
In a zero-sum game one player’s loss is another’s gain, so the sum of the
payoffs is zero.