1. Midterm Scores Total of 200 points, 40 per question. A--155-200 B—120-154 C—80-119 D—50-79 F <50 Median Score 125, Top Score 180

2. Bayes-Nash equilibrium with Incomplete Information

3. What’s New here? Incomplete information: In previous examples we had “Imperfect Information”. Players knew each others payoffs, but might not know other’s moves. In these problems, players know their own payoffs, but may not know other Players’ payoffs

4. Bayesian Game Nature determines each player’s type. One’s type determines one’s payoffs. Player learns own type, but only the probability distribution of others’ types. A strategy specifies what a player would do conditional on being of each possible type.

5. Bayes-Nash equilibrium Each player in a given type will play a best strategy for that type, given the player’s beliefs about the probabilities of other types.

6. =p =1-p Simple Example: Greg and Marcia Two possible types of Marcia How many possible strategies does Marcia have? A) 1 B) 2 C) 3 D) 4 E) 8

7. How many strategies are possible for Greg? A)1 B)2 C)3 D)4 E)8

8. Strategies for Marcia Say yes, whether you like him or not Say no, whether you like him or not Say yes if you like him, no if you don’t Say no if you like him, yes if you don’t

9. What does Greg do? Greg knows that whatever her type, Marcia’s strategy will be her best one. This is yes if she likes him, no if she doesn’t. If probability that she likes him is p, his expected payoff from Invite is 10p+2(1-p)=2+8p If he doesn’t invite her, his payoff is 3 He will invite her if 2+8p>3. That is, if p>1/8

10. Wyatt Earp and the Gun Slinger

11. The story Wyatt Earp is town marshall in Dodge City. A stranger comes to town. Earp doesn’t know if the stranger is a gunslinger or an ordinary cowboy. Earp faces the stranger after a saloon brawl. Earp and the stranger must simultaneously decide whether to draw their guns.

12. A Bayesian gunslinger game

13. What are the strategies? Earp – Draw – Wait Stranger – Draw if Gunslinger, Draw if Cowpoke – Draw if Gunslinger, Wait if Cowpoke – Wait if Gunslinger, Draw if Cowpoke – Wait if Gunslinger, Wait if Cowpoke

14. The gunfight game when the stranger is (a) a gunslinger or (b) a cowpoke

15. Things to notice about SPNE If stranger is a gunslinger, he will always draw. In the subgame where stranger is a cowboy, there are two Nash equilibria. In one of them, Cowboy and Earp both Wait. In the other, Cowboy and Earp both Draw.

16. When is there a “peaceful” equilibrium? Suppose that Earp waits and the other guy draws if he is a gunslinger, waits if he is a cowpoke. – Stranger in either case is doing a best response. – If stranger follows this rule, is waiting best for Earp? Let p be the probability that stranger is a gunslinger – Earp’s Payoff from waiting is px1+(1-p)x8=8-7p. – Earp’s Payoff from drawing, given these strategies for the other guys is px2+((1-p)x4=4-2p. Wait is a best response for Earp if 8-7p>4-2p, which implies that p<4/5.

17. One equilibrium We conclude that if the probability that the stranger is a gunslinger is less than 4/5, there is a Bayes-Nash equilibrium in which Earp waits, and in which the cowboy draws if he is a gunslinger and waits if he is a cowboy.

18. Another equilibrium? Is there is an equilibrium in which everybody draws. If Earp always draws, both cowpoke and gunslinger are better off drawing. Let p be probability stranger is gunslinger. If both types always draw, payoff to Earp from Draw is 2p+5(1-p)=5-3p and payoff to Earp from Wait is p+6(1-p)=6-5p Now 5-3p>6-5p if p>1/2.

19. Two equilibria? We found that if p<4/5, there is a Bayes-Nash equilibrium in which Earp waits and Stranger draws if he is a gunslinger, waits if he is a Cowboy. If p>1/2, there is a Bayes-Nash equilibrium in which Earp draws and Stranger draws, regardless of his type. So if ½<p<4/5 there are two Bayes-Nash equilibria. What if p 4/5?

20. Another gunfight: Bat and Curly Problem 10.2 Both men have private information about whether they are fast shooters or slow shooters. Curly believes that probability Bat is fast is.65. Bat believes that probability Curly is fast is.60. Each must decide whether to Draw or Wait.

21. Payoff table FDFWSDSW FD20,2030,-40 FW-40,3050,5020,2050,50 SD-40,3020,20 40,-30 SW-40,3050,50-40,3050,50 Bat Curly Table shows payoffs to Bat and Curly conditional on their actions and type. Note: This is not a strategic form representation. A strategy takes the form x/y where x is what you do if you are fast and y is what you do if you are slow. Is D/D for both players a SPNE? Need to show that if Curly always draws, Bat will prefer to draw if he is fast and also if he is slow. Also need to show that if Bat always draws, Curly will prefer to draw if he is fast also if he is slow.

22. Suppose Curly always draws… If Bat draws when he is fast his expected payoff is.6 x 20 +.4 x 30=24. If Bat waits when he is fast, his expected payoff is.5x(- 40)+.4x20=-12 So if Bat is fast, Bat’s best response is draw. If Bat draws when he is slow, his expected payoff is.6x(- 40)+.4x20=-16. If Bat waits when he is slow, his expected payoff is.6 x(- 40)+.4x(-40)=-40. So if Bat is slow, his best response is draw. Thus if Curly always draws, Bat’s best response is to always draw.

23. Suppose Bat always draws Suppose Curly is fast. – If he draws, his expected payoff is.65x 20 +.35x30=25.5. – If he waits, his expected payoff is.65x(-40)+.35x20=-19. -So if Bat always draws, and if Curly is fast, his best response is Draw. Suppose Curly is slow. – If he draws, his expected payoff is.65x(-40)+.35x20. – If he waits, his expected payoff is.65x(-40)+.35x(-30). So if Curly is slow, is best response is Draw Conclusion: If Bat always draws, Curly’s best response is to always draw.

24. Some conclusions We showed that there is a Bayes Nash equlibrium where both always draw. A similar exercise will show that there is also an equilibrium where both always wait. Another similar exercise will show that there is also an equilibrium where each of them will draw if and only if he is slow.

25. Problem 10.5 Find Bayes-Nash equilibrium How many strategies are there for Players 1 and 2? A) 4 for 1, 2 for 2 B) 4 for each player C) 2 for each player D) 2 for 1, 8 for 2 E) 4 for 1, 8 for 2

26. Problem 10.5 Find Bayes-Nash equilibrium If Player 2 plays a, best response for Player 1 is x if High type, y if low type. If Player 2 plays b, best response for Player 1 is y for either type.

27. 1) If Player 2 plays a, best response for Player 1 is x if High type, y if low type. 2) If Player 2 plays b, best response for Player 1 is y for either type. We found that: Now we want to know whether: A)if a is the best response for Player 2 when Player 1 plays x if High type and y if low type. And whether: B) b is the best response for Player 2 when Player 1 always plays y. A) If Player 1 plays x if High type and y if low type, and if p is the probability that Player 1 is a high type, then the expected payoff to Player 2 from playing a is px1+(1-p)x1=1. And the expected Payoff to 2 from playing b is px3 +0. Playing a is the best response if 1>3p or p<1/3. B) If Player 1 always plays y, then the expected payoff to Player 2 from playing a is 1xp+1x(1-p)=1 and the expected payoff to Player 2 from playing b is 2xp+0=2p. Thus for Player 2, b is the best response when Player 1 always plays y if 2p>1, which means p >1/2.

28. Summing up If p<1/3, there is a Bayes-Nash equilibrium in which Player 1 plays x if high and y if low and Player 2 plays a. There is another Bayes-Nash equilibrium in which Player 1 always plays y and Player 2 plays b.

29. The Perils of Alice and Bob: Revisited

30. Does she or doesn’t she Bob doesn’t know whether Alice likes him or not. Whether or not she likes him, he likes to be with her. Bob and Alice must each decide on which of two movies to go to. Suppose that Bob chooses which movie to go to and, as both know, Alice has a spy who will tell her where he is going before she chooses which to go to.

31. She loves me, she loves me not? ( Bob moves before Alice) Go to A Go to B Go to A Alice Go to B Go to A Go to B 2323 0000 1111 3232 She loves him Nature She scorns him Go to A Go to B 2121 0202 1313 3030 Bob Alice Bob Alice

32. What are their strategies? For Bob – Go to A – Go to B Alice has four information sets. – I Love him and he’s at A – I Love him and he’s at B – I Scorn him and he’s at A – I Scorn him and he’s at B In each information set, she can go to either A or B. This gives her 2x2x2x2=16 possible strategies.

33. A weakly dominant strategy for Alice Go to A if you love him and he goes to A. Go to B if you love him and he goes B. Go to B if you scorn him and he goes to A. Go to A if you scorn him and he goes to B. (We write this as A/B/B/A) This is weakly dominant but not strictly dominant. Explain. Let’s look for a subgame perfect Nash equilibrium where Alice goes A/B/B/A

34. Checking equilibrium Suppose Alice goes where Bob is if she loves him and goes where he is not if she scorns him. (A/B/B/A) Payoff to Bob from A is 2p. Payoff from B is 3p+1(1-p)=2p+1. Since 2p+1>2p, for all p>=0, B is his best response to (A/B/B/A). Also A/B/B/A is a best response for Alice to Bob’s B. So we have a Bayes-Nash equilibrium.

35. Simultaneous choice The story gets more complex (and interesting) if Bob and Alice must choose their movies simultaneously, so neither knows what the other did when choosing a movie.

36. Does she or doesn’t she? Simultaneous Play Go to A Go to B Go to A Alice Go to B Go to A Go to B 2323 0000 1111 3232 She loves him Nature She scorns him Go to A Go to B 2121 0202 1313 3030 Bob Alice Bob Alice

37. Alice’s (pure) strategies Alice doesn’t know what Bob did, so she can’t make her action depend on his choice. She can go to either A or B. She does know whether she loves him or scorns him when she chooses. She has 4 possible strategies – A if love, A if scorn – A if love, B if scorn – B if love, A if scorn – B if love, B if scorn

38. Bayes’ Nash equilibrium Is there a Bayes’ Nash equilibrium where Bob goes to B and Alice goes to B if she loves Bob, and to A if she scorns him? – This is a best response for both Alice types. – What about Bob?

39. Bob’s Calculations If Bob thinks the probability that Alice loves him is p and Alice will go to B if she loves him and A if she scorns him: – His expected payoff from going to B is 3p+1(1-p)=1+2p. – His expected payoff from going to A is 2(1-p)+0p=2-2p. Going to B is Bob’s best response to the strategies of the Alice types if 1+2p>=2-2p. Equivalently p>=1/4.

40. What we know so far If Bob goes to B for sure, then Alice’s best response is to go to B if she loves Bob and A if she scorns Bob. If Alice goes to B if she loves Bob and A if she scorns him, then Bob’s best response is to go to B for sure if and only if p≥1/4. So if p≥1/4, there will be a Nash equilibrium where Bob uses the pure strategy go to B, but if p<1/4, there is no Nash equilibrium where Bob goes to B.

41. A more surprising pure strategy N.E. Suppose that Bob goes to movie A for sure. The best response for Alice is to go to movie A if she loves Bob and movie B if she scorns him. If this is Alice’s strategy, then Bob’s expected payoff from going to A is 2p+0(1-p)=2p and his expected payoff from going to B is p+3(1-p)=3-2p. Going to A will be his best response if 2p≥3-2p, which means p≥3/4. So there will be a pure strategy N.E. in which Bob goes to movie A for sure if and only if p≥3/4.

42. When is there a pure strategy N.E.? We have discovered that there is a pure strategy N.E. where Bob goes to B if and only if p≥1/4 and there will be a pure strategy N.E where Bob goes to B if and only if p≥3/4. It follows that if p<1/4 there is no pure strategy N.E. and if p≥3/4, there are two pure strategy N.E.

43. Is there any Bayes-Nash equilibrium in pure strategies if p<1/4? A)Yes, Alice goes to B if she loves Bob and A if she scorns him and Bob goes to B. B)Yes, Alice goes to A if she loves Bob and B if she scorns him and Bob goes to B. C)Yes there is one, where Alice always goes to A. D)No there is no Bayes-Nash equilibrium in pure strategies.

44. What If p<1/4 We found that there is no pure strategy N.E in this case. What about a mixed strategy NE?

45. Mixed strategy equilbrium: Bob the stalker If Bob thinks it likely that Alice scorns him, then if he uses a pure strategy, he knows that if Alice scorns him, she will avoid him. If he uses a mixed strategy, he would catch her sometimes. Let’s look for a mixed strategy for Bob such that Alice, if she scorns Bob would be indifferent between Movies A and B.

46. What about a mixed strategy equilibrium? If p<1/4, can we find a mixed strategy for Bob such that Alice is indifferent Let’s check out what would happen if Bob knows Alice scorns him? Consider the Alice type who scorns Bob. If Bob goes to movie A with probability q, When will Alice be indifferent between going to the two movies?

47. The game if Alice scorns Bob AB A1,23,1 B2,00,3 Bob Alice

48. Making Scornful Alice indifferent If Bob goes to Movie A with probability q and Alice Scorns Bob: – Alice’s payoff from A is 1q+3(1-q) =3-2q – Alice’s payoff from B is 2q+0(1-q)=2q – Alice will be indifferent if 3-2q=2q, which implies q=3/4.

49. When will Bob do a mixed strategy? Note that if Bob goes to A with probability ¾, and if Alice loves him, her best response is to go to Movie A. If there is an equilibrium where Bob uses a mixed strategy, he must be indifferent between going to A and going to B. Can we find a mixed strategy for Alice to use if she scorns him so that Bob will be indifferent between A and B?

50. Making Bob indifferent Let r be the probability that Alice goes to Movie A if she scorns Bob and suppose that Alice always goes to A if she loves Bob. Expected payoffs for Bob are – If he goes to A, 2p+(1-p)(2r+0(1-r))=2p-2pr+2r – If he goes to B, 1p+(1-p)(1r+3(1-r))=2p+3+2pr-2r – He is indifferent between A and B if these are equal. This implies r=(3-4p)/4-4p. Now r is between 0 and 1 if and only if p≤3/4

51. Summing up We have learned that if p<1/4, there is no pure strategy Nash equilibrium, but there is a mixed strategy equilibrium. When 1/4≤p≤3/4, there is one pure strategy N.E. and one mixed strategy Bayes-Nash equilibrium. In the pure strategy equilibrium, Bob always goes to movie B. When ¾≤p≤1 there is no mixed strategy equilibrium, but there are two pure strategy Nash equilibrium. In one pure strategy equilibrium, Bob goes to B and in the other he goes to A. In the mixed strategy equilibria, Bob goes to movie A with probability ¾, Alice goes to Movie A if she loves Bob and she goes to movie A with probability r=(3- 4p)/(4-4p) if she scorns him.

52. Maybe, later?