Lecture 5 - Nash Equilibrium

Watson 9
Econ 106G Spring, 2014
Coordination and Anti-Coordination Games
Coordination
Two friends have gone to Disneyland together and lost each other there. There are two focal
points to meet, the Matterhorn or Space Mountain. The players have to decide independently
which of the focal points to go to. They do not care per se where they meet but they do
want to meet somewhere.
2
M S
1 M 5, 5 0, 0
S 0, 0 5, 5
This game has no (even weakly) dominated strategies. Elimination of dominated strate-
gies thus does not reduce the set of rational or rationalizable strategies.
For player 1,

if she believes s
2
= M; she should play M;
if she believes s
2
= S; she should play S:
Anti-Coordination
Consider the Chicken game from the rst homework
Plato
S C
Jim S 5 , 5 5 , 0
C 0 , 5 2 , 2
Whether or not Jim should chicken out, depend on Platos plans and vice versa.
Nash Equilibrium
Denition
We dened the set of player is best responses BR
i
(
i
) to his belief
i
about others
strategies, as the strategies s
i
that maximize his expected utility given beliefs
i
. A special
case is when player i is certain that others will play strategies s
i
, i.e. when his belief
i
assigns probability
i
(s
i
) = 1 to strategies s
i
. In this case we identify is belief with s
i
1
and write is best responses as BR
i
(s
i
). If there is a unique strategy s
i
in BR
i
(s
i
) we
call BR
i
: S
i
! S
i
the best-response function.
In both the coordination game and the anti-coordination game both strategies of both
players are best responses to some beliefs.
Thus, all beliefs about the other players strategies are reasonable. If the players have no
experience playing the game and they have no way to coordinate, every strategy prole is a
reasonable prediction of the coordination game; even (M; S) and (S; M) which give payos
of 0 for either player.
However if from past experience, a social institution or direct communication players
have a good idea of what the other player will do (M; S) and (S; M) are not reasonable
predictions of behavior because they are not mutual best responses.
Denition 1 s

is a Nash equilibrium (NE) if (s

1
; :::; s

n
) are mutual best responses, i.e.
s

i
2 BR
i

or
u
i
(s

i
; s

i
) u
i
(s
0
i
; s

i
) for all s
0
i
2 S
i
:
In the coordination game example, (M; M) and (S; S) are both Nash equilibria, while
neither (M; S) and (S; M) is a Nash equilibrium.
In Chicken, both (C; S) and (S; C) are Nash equilibria, while (S; S) and (C; C) are not.
Further Examples
Battle of Sexes
2
B S
1 B 2, 1 0, 0
S 0, 0 1, 2
Both (B; B) and (S; S) are Nash equilibria.
The Stag Hunt
2
Stag Hare
1 Stag 2, 2 0, 1
Hare 1, 0 1, 1
Both (S; S) and (H; H) are Nash equilibria.
2
Matching Pennies
2
H T
1 H 1, 0 0, 1
T 0, 1 1, 0
There is no (pure strategy) Nash equilibrium. (As we will learn later, there is a Nash
equilibrium consisting of mixed strategies in this game.)
Why should we consider Nash equilibrium?
Self-enforcing: Once players agree to play a NE, then they have incentive to play the
NE (as long as all the other players do) without any external enforcement. In another
word, NE is self-enforcing.
Learning: Suppose that players play the same game over and over, and after a while,
they settle on some strategy s

and play it period after period. Suppose also that they

only care about their current payos when choosing their strategies. Since they should
expect that s

is played in the next period in such a situation, there should not exist
any protable unilateral deviation from s

. This implies that s

must be a NE. This

suggests that the stable outcome which is reached over time must be a NE.
Adaptation: If players always adapt to a better strategy (maybe by experimentation
or evolution), the stable outcome must be a Nash equilibrium by the same reason as
above. So players do not necessarily have to be rational to play Nash equilibrium.
Even some insects and plants play NE!
Nash Equilibrium vs. Dominant strategies
If players they will play best responses to
are rational some beliefs
have common knowledge of rationality best responses to best responses ...
are rational and somehow coordinated correct beliefs
If both concepts predict behavior the predictions should not contradict each other.
Proposition 2 1. Every strategy s

i
in a Nash equilibrium s

= (s

1
; :::; s

n
) is rationaliz-
able.
2. The solution of a dominance solvable game is a Nash equilibrium of the game.
3. There are Nash equilibria in weakly dominated strategies
3
Proof. 1) Let us assume that the strategy prole s

= (s

1
; :::; s

n
) has survived the rst
k rounds of iterated deletion, i.e. s

i
2 BR
k
i
for all i. To show that s

i
2 BR
k+1
i
we need
to nd a belief
i
that assigns positive probability only to strategies s
i
in BR
k
i
, and for
which s

i
is a best response. The belief
i
that assigns probability 1 to s

i
, and 0 to all
other strategies has both of these properties, because (a) s

i
2 BR
k
i
, and (b) s

is a Nash
equilibrium.
2) Consider the unique rationalizable strategy prole s

= (s

1
; :::; s

n
). For any alternative
strategy s
0
i
6= s

i
, we will show that
u
i
(s

i
; s

i
) > u
i
(s
0
i
; s

i
).
(so s

is actually a strict Nash equilibrium!). As s

i
is the only rationalizable strategy of i,
the alternative strategy s
0
i
must have been strictly dominated by some strategy s
00
i
in some
round k. If s
00
i
= s

i
, then
u
i
(s

i
; s

i
) = u
i
(s
00
i
; s

i
) > u
i
(s
0
i
; s

i
)
and we are done. If s
00
i
6= s

i
, then s
00
i
itself must have been strictly dominated by some
alternative strategy s
000
i
in some round `. If s
000
i
= s

i
, then
u
i
(s

i
; s

i
) = u
i
(s
000
i
; s

i
) > u
i
(s
00
i
; s

i
) > u
i
(s
0
i
; s

i
)
and we are done. If s
000
i
6= s

i
, then ...
3) Example 1: The TV vs. Ice cream example from the rst set of practice problems
John
Ice cream TV
Jane Ice cream 1 , 1 0 , 0
TV 0 , 0 0 , 0
.
While, ice cream is a weakly dominant strategy for either player, (TV; TV ) is a Nash
equilibrium as well.
Example 2: Voting in a referendum: If nobody else votes, it is a (weak) best response to
not vote oneself. Therefore, everybody not voting is a Nash equilibrium in the referendum
game.
4