SARANI SAHABHATTACHARYA, HSS

ARNAB BHATTACHARYA, CSE

07 JAN, 2009
Game Theory and its
Applications
Prisoners Dilemma
Two suspects arrested for a crime
Prisoners decide whether to confess or not to confess
If both confess, both sentenced to 3 months of jail
If both do not confess, then both will be sentenced to
1 month of jail
If one confesses and the other does not, then the
confessor gets freed (0 months of jail) and the non-
confessor sentenced to 9 months of jail
What should each prisoner do?

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Game Theory
Battle of Sexes
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A couple deciding how to spend the evening
Wife would like to go for a movie
Husband would like to go for a cricket match
Both however want to spend the time together
Scope for strategic interaction
Games
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Normal Form representation Payoff Matrix

Confess Not Confess
Confess -3,-3 0,-9
Not Confess -9,0 -1,-1
Movie Cricket
Movie 2,1 0,0
Cricket 0,0 1,2
Prisoner 1
Prisoner 2
Wife
Husband
Nash equilibrium
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Each players predicted strategy is the best response
to the predicted strategies of other players
No incentive to deviate unilaterally
Strategically stable or self-enforcing


Confess Not Confess
Confess -3,-3 0,-9
Not Confess -9,0 -1,-1
Prisoner 1
Prisoner 2
Mixed strategies
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A probability distribution over the pure strategies of
the game
Rock-paper-scissors game
Each player simultaneously forms his or her hand into the
shape of either a rock, a piece of paper, or a pair of scissors
Rule: rock beats (breaks) scissors, scissors beats (cuts) paper,
and paper beats (covers) rock
No pure strategy Nash equilibrium
One mixed strategy Nash equilibrium each player
plays rock, paper and scissors each with 1/3
probability
Nashs Theorem
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Existence
Any finite game will have at least one Nash equilibrium
possibly involving mixed strategies
Finding a Nash equilibrium is not easy
Not efficient from an algorithmic point of view
Dynamic games
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Sequential moves
One player moves
Second player observes and then moves
Examples
Industrial Organization a new entering firm in the market
versus an incumbent firm; a leader-follower game in quantity
competition
Sequential bargaining game - two players bargain over the
division of a pie of size 1 ; the players alternate in making
offers
Game Tree
Game tree example: Bargaining
0
1
A
0
1
B
0
1
A
B B
A
x
1

(x
1
,1-x
1
)
Y
N
x
2

x
3

(x
3
,1-x
3
)
(x
2
,1-x
2
)
(0,0)
Y
Y
N
N
Period 1:
A offers x
1
.
B responds.
Period 2:
B offers x
2
.
A responds.
Period 3:
A offers x
3
.

B responds.
Economic applications of game theory
The study of oligopolies (industries containing only
a few firms)
The study of cartels, e.g., OPEC
The study of externalities, e.g., using a common
resource such as a fishery
The study of military strategies
The study of international negotiations
Bargaining
Auctions
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Games of incomplete information
First Price Sealed Bid Auction
Buyers simultaneously submit their bids
Buyers valuations of the good unknown to each other
Highest Bidder wins and gets the good at the amount he bid
Nash Equilibrium: Each person would bid less than what the good
is worth to you
Second Price Sealed Bid Auction
Same rules
Exception Winner pays the second highest bid and gets the good
Nash equilibrium: Each person exactly bids the goods valuation




Second-price auction
Suppose you value an item at 100
You should bid 100 for the item
If you bid 90
Someone bids more than 100: you lose anyway
Someone bids less than 90: you win anyway and pay second-price
Someone bids 95: you lose; you could have won by paying 95
If you bid 110
Someone bids more than 11o: you lose anyway
Someone bids less than 100: you win anyway and pay second-price
Someone bids 105: you win; but you pay 105, i.e., 5 more than
what you value
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Mechanism design
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How to set up a game to achieve a certain outcome?
Structure of the game
Payoffs
Players may have private information
Example
To design an efficient trade, i.e., an item is sold only when
buyer values it as least as seller
Second-price (or second-bid) auction
Arrows impossibility theorem
No social choice mechanism is desirable
Akin to algorithms in computer science
Inefficiency of Nash equilibrium
Can we quantify the inefficiency?
Does restriction of player behaviors help?
Distributed systems
Does centralized servers help much?
Price of anarchy
Ratio of payoff of optimal outcome to that of worst possible
Nash equilibrium
In the Prisoners Dilemma example, it is 3
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Network example
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Simple network from s to t with two links
Delay (or cost) of transmission is C(x)
Total amount of data to be transmitted is 1
Optimal: is sent through lower link
Total cost = 3/4
Game theory solution (selfish routing)
Each bit will be transmitted using the lower link
Not optimal: total cost = 1
Price of anarchy is, therefore, 4/3
C(x) = 1
C(x) = x
Do high-speed links always help?
of the data will take route s-u-t, and s-v-t
Total delay is 3/2
Add another zero-delay link from u to v
All data will now switch to s-u-v-t route
Total delay now becomes 2
Adding the link actually makes situation worse
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C(x) = x
C(x) = 1
C(x) = 1
C(x) = x
C(x) = x
C(x) = 1
C(x) = 1
C(x) = x
C(x) = 0
Other computer science applications
Internet
Routing
Job scheduling
Competition in client-server systems
Peer-to-peer systems
Cryptology
Network security
Sensor networks
Game programming
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Bidding up to 50
Two-person game
Start with a number from 1-4
You can add 1-4 to your opponents number and bid
that
The first person to bid 50 (or more) wins
Example
3, 5, 8, 12, 15, 19, 22, 25, 27, 30, 33, 34, 38, 40, 41, 43, 46, 50
Game theory tells us that person 2 always has a
winning strategy
Bid 5, 10, 15, , 50
Easy to train a computer to win
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Game programming
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Counting game does not depend on opponents choice
Tic-tac-toe, chess, etc. depend on opponents moves
You want a move that has the best chance of winning
However, chances of winning depend on opponents
subsequent moves
You choose a move where the worst-case winning
chance (opponents best play) is the best: max-min
Minmax principle says that this strategy is equal to
opponents min-max strategy
The worse your opponents best move is, the better is your move
Chess programming
How to find the max-min move?
Evaluate all possible scenarios
For chess, number of such possibilities is enormous
Beyond the reach of computers
How to even systematically track all such moves?
Game tree
How to evaluate a move?
Are two pawns better than a knight?
Heuristics
Approximate but reasonable answers
Too much deep analysis may lead to defeat

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Conclusions
Mimics most real-life situations well
Solving may not be efficient
Applications are in almost all fields
Big assumption: players being rational
Can you think of unrational game theory?
Thank you!
Discussion
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