1. Chapter 6 Extensive Games, perfect info
Detailed description of the sequential structure of strategic situations
as opposed to Strategic Games
Players perfectly informed of occurred events
Initially decisions are not made at the same time, no randomness

2. Example 91.1 / Def. 89.1 Extensive game: Players to share two objects
Conventional definition with trees as primitives: 1 2
(0,2)
(2,0) no
yes
2,0
0,0
1,1
0,2
(1,1)

3. Definition with players´ actions as primitives:
G = (N, H, P, (i))
A Set of Players
N = {1,2}
A Set of possible histories (sequences, finite or infinite)
H = {, (2, 0), (1, 1), (0, 2), ((2, 0), yes), ((2, 0), no), ((1, 1), yes), ((1, 0), no), ((0, 2), yes), ((0, 2), no)}
Terminal histories
Z = {((2, 0), yes), ((2, 0), no), ((1, 1), yes), ((1, 1), no), ((0, 2), yes), ((0, 2), no)} 1 2
(0,2)
(2,0) no
yes
2,0
0,0
1,1
0,2
(1,1)

4. A player function that assigns a player to each non terminal history
P() = 1 and P(h) = 2 for every non terminal h  
A preference relation for each player on Z:
i: ((2, 0), yes) >1 ((1, 1), yes) >1 ((0, 2), yes) ~1 ((2, 0), no) ~1 ((1, 1) ~1 yes) ~1((1, 1), no) and ((2, 0), yes) >2 ((1, 1), yes) >2 ((0, 2), yes) ~2 ((2, 0), no) ~2 ((1, 1) ~2 yes) ~2((1, 1), no) 1 2
(0,2)
(2,0) no
yes
2,0
0,0
1,1
0,2
(1,1)

5. Def Strategies
A strategy of player i is a function that assigns an action to each nonterminal history
Even for histories that, if strategy is followed, are never reached
Player 1 below has AE, AF, BE, BF
The outcome O(s) of strategy profile s = (si)iN yields the terminal history when each player i follows si 1 A B 2 d C D 1 E c F a b

6. Def Nash Equilibrium
Nash Equilibrium for an extensive game with perfect info is a strategy profile s* such that for every player iN we have
O(s*-i, s*i) i O(s*-i, si) for every strategy si of player i
(If other players follows s* you would better follow s* too... )
Alternatively it is the Nash Equilibrium of a strategic game derived from the extensive game

7. Equivalent strategic games1 A B 2 d C D 1 E c F a b
Extensive Game
Equivalent Strategic Game
Equivalent Strategic Game Reduced form

8. Example 95.2 1 A B 2 L R
1, 2
2, 1
0, 0
Given that player 2 chooses L it is optimal for player 1 to choose B
The Nash equilibrium (B,L) lacks plausibility since P2 wouldn’t choose L after A.

9. Def Subgame
(h) = (N, H|h, P|h, (i)|h) is the subgame to  = (N, H, P, (i)) that follows the history h h
(h)

10. Def. 97.2 Subgame Perfect Equlibrium
A subgame perfect equilibrium is a strategy profile s* such that for any history h the strategy profile s*|h is a Nash equlibrium of the subgame (h)
OR?

11. Example 95.2 again (A) (B,L) is a Nash equilibrium1 A B 2 L R
1, 2
0, 0
(A)
2, 1
(B,L) is a Nash equilibrium
Is (B,L) a subgame perfect equilibrium?
The strategy profile s*|h = (B,L)|A in the subgame (A) is for instance no Nash Equilibrium
Player 2 wouldn’t chose L given that player 1 has chosen A

12. Prop Kuhn´s Theorem
Every finite extensive game with perfect info has a subgame perfect equilibrium.
E.g chess is draw once a position is repeated three times => chess is finite

13. Two Extensions to Extensive Games with perfect info
Exogenous uncertainty
The Player function P(h) has a probability that chance determines the action after the history h
Definition of a subgame perfect equilibrium and Kuhn’s theorem still OK
Simultaneous moves
The Player function P(h) assigns a set of players that make choices after the history h

14. 6.5.1 The Chain Store Game Multitude of Nash equilibria
Every terminal history which the outcome in any period is either Out or (In,C)
Intuitively unappealing for small K
Unique Subgame Perfect Equilibrium
Always (In, C)
Not that appealing for large K k In
Out CS F C
5 ,1
2, 2
0, 0

15. Ex. 110.1 BoS with an outside option
Elimination of dominated actions yields: (B, B)
Interpretation
BB >1 Book >1 SS >1 BS ~1 SB
Player 2 knows that if player 1 selects concert he would choose Bach otherwise he would better stay home reading the book
Thus player 1 can select B knowing that player 2 also selects B 1
Book
Concert
2, 2

16. Ex Burning money
Elimination of dominated actions yields: (0B, BB)
Interpretation:
P2 thinks that if P1 spends D then he wants to go Bach otherwise he would loose compared to not spending D => P2 chooses B if P1 chooses D
P1 knows this and can expect a payoff of 2 by choosing DB
P2 knows that the rationality of P1 choosing 0 is that he expects to gain better than 2 (by choosing DB)
Thus P1 can choose 0B and gain 3
Authors think that this example is implausible 1 D