ECON20005 Competition and Strategy Tutorial 2: Solutions
1 Nash Equilibrium
(a) The following table underlines the payoffs corresponding to each player’s best responses.
L R
U 3, 2 2, 3
D 4, 1 1, 4
A strategy profile is a PSNE if and only if both payoffs are highlighted. Clearly, the unique
PSNE strategy is: Player 1 plays U and Player 2 plays R. U is a best response of Player 1
to R, and R is a best response of Player 2 to U .
(c)
L M R
U 0, 1 9, 0 2, 3
S 5, 9 7, 3 1, 7
D 7, 5 10, 10 3, 5
A strategy profile is a PSNE if and only if both payoffs are highlighted. Clearly, the unique
PSNE strategy is: Player 1 plays D and Player 2 plays M . Note also that each of Player 1’s
highlighted payoffs is in row D, indicating that D is strictly dominant. You should verify
that this game is dominance solvable: there is a unique strategy profile that survives iterated
elimination of strictly dominated strategies (IESDS).
2 Constructing a game table and solving it
(a) Game table:
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ECON20005 Competition and Strategy Tutorial 2: Solutions
G K L Q R W
G 3, 6 0, 0 0, 0 0, 0 0, 0 0, 0
K 0, 0 2, 5 0, 0 0, 0 0, 0 0, 0
L 0, 0 0, 0 6, 4 0, 0 0, 0 0, 0
Q 0, 0 0, 0 0, 0 3, 3 0, 0 0, 0
R 0, 0 0, 0 0, 0 0, 0 4, 2 0, 0
W 0, 0 0, 0 0, 0 0, 0 0, 0 5, 1
The NE in pure strategies are whenever the two players play the same strategy:
• Player 1 plays G; Player 2 plays G
• Player 1 plays K; Player 2 plays K
• Player 1 plays L; Player 2 plays L
• Player 1 plays Q; Player 2 plays Q
• Player 1 plays R; Player 2 plays R
• Player 1 plays W ; Player 2 plays W
(b) In principle, any of the equilibria could be focal points depend on the underlying common
cultural understanding of the players. To be a focal equilibrium, the players’ expectations
must coincide. For example, the equilibrium where Player 1 plays Q and Player 2 plays Q
might be a focal point when the society cares about fairness, while the equilibrium where
Player 1 plays L and Player 2 plays L might be a focal point in a society that cares about
maximizing the total payoff.
3 A Beautiful Blonde
(a) Game table:
Blonde Brunette
Blonde 0, 0 10, 5
Brunette 5, 10 5, 5
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ECON20005 Competition and Strategy Tutorial 2: Solutions
There are two PSNEs:
1. Player 1 plays Blonde; Player 2 plays Brunette
2. Player 1 plays Brunette; Player 2 plays Blonde
(b) This clearly cannot be a Nash Equilibrium. If some man approaches a Brunette woman, then
the other would have an incentive to change his action and to approach the Blonde, as this
gives him a higher payoff.
4 Converting Sequential Games
The normal (strategic) form of this game as follows:
t b
N 0, 2 2, 1
S 1, 0 1, 0
The unique NE is as follow:
• NE strategies: Player 1 plays S; Player 2 plays t.
This also corresponds to the SPNE of the extensive form game.
5 3-Player Game Tree
(a) There are as many subgames as nonterminal histories (nodes). Hence, there are 7 subgames:
6 proper subgames and the game itself.
(b) Since Player 1 has a single decision node, her strategies coincide with her actions. We can
write Player 1’s strategies as S1 = (A), (B).
Since Player 2 has two decision nodes and two actions available at each node, her strategies
can be identified with pairs (a1 , a2 ) of actions from the set {C, D}:12
S1 = {C, D} × {C, D} = {C, D}2 = (C, C) , (C, D) , (D, C) , (D, D) .
1
Of course, you could write a strategy such as (C, D) as, say, CD or (A : C, B : D). Just be sure to clarify any
notation that might not be obvious to the reader.
2
The (Cartesian) product of sets A and B is the set A × B = {(a, b) | a ∈ A, b ∈ B}.
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ECON20005 Competition and Strategy Tutorial 2: Solutions
Note that the size of the set {C, D}2 is 22 .
Since Player 3 has four decision nodes and two actions available at each node, her strategies
can be identified with 4-tuples (a1 , a2 , a3 , a4 ) of actions drawn from the set {E, F }:
S2 = {E, F }4 = {(E, E, E, E) , (E, E, E, F ) , . . . , (F, F, F, E) , (F, F, F, F )} .
There are too many strategies to list here (24 = 16), which highlights that the product
notation {E, F }4 is extremely convenient.
(c) Backward induction:
1
A B
2 2
C D C D
3 3 3 3
E F E F E F E F
(1, 1, 1) (1, 1, 3) (1, 5, 2) (1, 5, 3) (2, 2, 6) (8, 7, 3) (4,4,4) (10, 5, 3)
With the tree highlighted in this way, we can read of the strategies immediately. The unique
SPNE is as follow:
• SPNE strategies: Player 1 plays (B); Player 2 plays (D, D); Player 3 plays (F, F, E, E).
(d) The SPNE path is: Player 1 chooses B, Player 2 chooses D, and Player 3 chooses E.
6 Nash Equilibria vs. Subgame Perfect Nash Equilibria
(a) In extensive form:
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ECON20005 Competition and Strategy Tutorial 2: Solutions
G1
C T
G2 G2
c t c t
(−1, −1) (−2, 2) (2, −2) (−5, −5)
G1
C T
G2 G2
c t c t
(−1, −1) (−2, 2) (2, -2) (−5, −5)
The unique SPNE is as follow:
• SPNE strategies: Player 1 plays (Tough); Player 2 plays (Tough, Chicken)
• SPNE path: Player 1 chooses Tough and Player 2 chooses Chicken
• SPNE payoffs: (2, −2)
(b) In normal form:
(c, c) (c, t) (t, c) (t, t)
C −1, −1 −1, −1 −2, 2 −2, 2
T 2, −2 −5, −5 2, −2 −5, −5
There are three PSNEs:
1. Player 1 plays C; Player 2 plays (t, t)
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ECON20005 Competition and Strategy Tutorial 2: Solutions
2. Player 1 plays T ; Player 2 plays (c, c)
3. Player 1 plays T ; Player 2 plays (t, c)
(b) The NE where
1. Player 1 plays T and Player 2 plays (c, c); and
2. Player 1 plays C and Player 2 plays (t, t)
are not subgame perfect because the strategies of Player 2 (the column player) include ac-
tions that are not optimal in some subgames.
In particular, the first strategy is not subgame perfect because it would not be optimal for
Player 2 to play c after Player 1 played C. The second strategy is not subgame perfect
because it would not be optimal for Player 2 to play t after Player 1 played T .
7 Rationality
This statement is false; a perfectly rational player may want to deviate from her Nash Equilibrium
strategy when her opponent is not perfectly rational.
To see this, suppose Player 2 is perfectly rational, but knows that Player 1 is not perfectly rational.
Player 2 then knows that Player 1 could play with some non-negligible probability D rather than
her strictly dominant strategy U . It can therefore be optimal for Player 2 to play L as this leads
to a much higher payoff than her Nash Equilibrium strategy M when Player 1 plays D, while it
leads to only a slightly lower payoff when player 1 plays U instead.
8 Sequential Games with Information Sets
(a) The game is one of imperfect information. Following action E from Player 1, Player 2 reaches
an information set with two nodes since it cannot observe whether Player 1 has taken action
T or B. Strategically, this is equivalent to saying that after Player 1 plays E, the players
take actions simultaneously.
(b) To solve for the SPNE, we first need to find the Nash equilibrium of the game that follows
action E from Player 1. That game has the Nash equilibrium strategy where Player 1 plays
T and Player 2 plays R. The corresponding payoffs are (3, 2). Then, at the initial node,
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ECON20005 Competition and Strategy Tutorial 2: Solutions
Player 1 chooses E and the SPNE strategy is: Player 1 plays (E, T ) and Player 2 plays (R).
This generates an equilibrium payoff of (3, 2).
(c) To find the set of NE, we need to represent the game in normal form. The set of strategies
for the two players are S1 = (E, T ), (E, B), (X, T ), (X, B) and S2 = (L), (R). The payoffs
are represented in the matrix.
Player 1/Player 2 L R
(E, T ) 0, 1 3, 2
(E, B) −1, 3 1, 5
(X, T ) 2, 6 2, 6
(X, B) 2, 6 2, 6
Then, the NE are as follow:
1. Player 1 plays (E, T ); Player 2 plays R
2. Player 1 plays (X, T ); Player 2 plays L
3. Player 1 plays (X, B); Player 2 plays L
(d) The strategies where
1. Player 1 plays (X, B) and Player 2 plays L; and
2. Player 1 plays (X, T ) and Player 2 plays L,
are not subgame perfect.
In particular, the first strategy is not subgame perfect because in the subgame following action
E by Player 1, the strategy where Player 1 plays B and Player 2 plays L do not constitute
equilibrium strategies. Similarly, the second strategy is not subgame perfect because in the
subgame following action E by Player 1, the strategy where Player 1 plays T and Player 2
plays L do not constitute equilibrium strategies. Note that a combination of strategies is
a subgame perfect equilibrium if it represents a Nash equilibrium of every subgame of the
original game.