final_re-take_march_solutions

Game Theory.
Really Final Exam with solutions
March 2011
Problem 1. (13 points) Three buyers compete in a sealed-bid auction. Their

valuations of the object are known to be distributed independently and uni-
formly on [0, 1]. It so happened that their actual values are v1 = .7; v2 =
.2; v3 = .9, but everybody only knows her own value. Assume that bidders are
risk-neutral. Using the appropriate formulas determine what bids will be sub-
mitted, who will win the auction at which price and what will be the seller’s
revenue if the auction mechanism is:
a) first-price
b) second-price
c) second-price with reserve price .8
d) all-pay
Solution discussed many times before... player 3 will win in every case. Under
first-price, given risk neutrality and independent values of n players, uniformly
distributed on [0, 1] the formula is bi = n−1
n vi so the winning bid b3 and hence
seller’s revenue will be .6. Under second-price, truth-telling (bi = vi ) is weakly
dominant so the revenue will be .7 with no reserve price and .8 when reserve
price is there. Under all-pay the formula is bi = n−1 n
n vi so after some math we
can establish that the revenue (sum of payments by 3 players) will be 0.722 if I
recall correctly...
Problem 2 (13 points) There are 6 tokens on the table. Two players alternate
removing some of the tokens. In each move any player can either remove exactly
one or exactly three tokens. Whoever removes the last token is the winner
(tokens are worthless per se – it does not matter who removed how many of
them).
1. Represent this game as a game tree
2. Which player is going to win? Find the subgame perfect Nash equilibrium
using backward induction. Precisely describe full strategies.
1
Solution Any action involves removal of an odd number of tokens. Thus it
takes an even number of moves to remove 6 tokens. Player 2 will win no matter
what. A concise description of SPNE strategies is thus (whatever, whatever).
Problem 3 (14 points) Consider three firms operating in an oligopolistic mar-

ket. Each of them simultaneously makes an independent choice of price, choos-
ing either pi = 2 (cheap) or pi = 3 (expensive). There are no production costs.
There are 12 customers, each buying one unit. If all firms charge the same price,
each attracts four customers. If one firm is cheap and two are expensive, the
cheap one attracts six customers, and expensive firms attract three customers
each. If two firms are cheap, they attract five customers each and the expensive
firm attracts two customers. Firms aim at maximum profits, i.e. maximize
product of own price and number of customers.
1. Represent this situation as a three-player non-cooperative game. Use two

matrices, one corresponding to the choice of p3 = 2, the other to p3 = 3,
with Firm 1 as row player and Firm 2 as column player. Find all pure-
strategy Nash equilibria.
Solution For p3 = 1 we have
p2 = 2 p2 = 3
p1 = 2 (8*,8*,8*) (10*,.6.10*)
p2 = 3 (6,10*,10*) (9,9,12)
For p3 = 2 we have
p2 = 2 p2 = 3
p1 = 2 (10*,10*,6) (12*,9,9)
p2 = 3 (9,12*,9) (12*,12*,12*)
There are two pure strategy NE: everyone choosing p = 2 and everyone
choosing p = 3. Note: expressions such as “NE for players 1 and 2” that I
have seen a few times don’t make any sense and only prove that you don’t
understand the concept of NE... NE means that EVERY player is best
responding. For player 3 you need to compare across matrices because we
can’t have a 3d matrix. For example, for (8,8,8) in the first matrix to be
a NE we require that player 3 cannot profitably switch to the upper left
cell of the second matrix.
2. Turn this game into a coalitional game (determine what each coalition can
jointly surely get no matter what others do).
Solution As explained in the class, the standard way of turning a non-
coop game into a coop one, is to answer the question what is the minimum
payoff that any coalition can guarantee by coordinated action, when others
are trying to hurt it. Any individual firm can only guarantee the payoff
2
of 8 by choosing pi = 2. Firms 1 and 2 can guarantee a joint payoff of 18
by choosing p1 = 3, p2 = 3. Same for other 2-firm coalitions. The grand
coalition can get 36. Thus we have.
V ({1}) = V ({2}) = V ({3}) = 8 (1)

V ({1, 2}) = V ({1, 3}) = V ({2, 3}) = 18
V ({1, 2, 3}) = 36
3. Identify the core of the coalitional game

Solution XS ≥ V (S) must be satisfied for every coalition, so only payoff
profiles (x1 , x2 , x3 ) satisfying:
xi ≥ 8, (2)
xi + xj ≥ 18 for i 6= j and thus xi ≤ 18
x1 + x2 + x3 = 36
belong to the core. These set of inequalities is not contradictory, it is

satisfied by many payoff profiles, e.g. (10, 14, 12).
4. Now, for each pure strategy Nash equilibrium consider payoff profile in-
duced by it. Which inequalities defining the core are satisfied, which are
violated? Comment on your results.
Solution Inequalities associated with one-players coalitions are necessar-
ily satisfied because in equilibrium no player can be getting less than what
he could have as guaranteed. The other inequalities are satisfied in the
“friendly” Pareto-efficient pi = 3 equilibrium only.

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Game Theory.

Really Final Exam with solutions

Problem 1. (13 points) Three buyers compete in a sealed-bid auction. Their

c) second-price with reserve price .8

1. Represent this game as a game tree

Problem 3 (14 points) Consider three firms operating in an oligopolistic mar-

1. Represent this situation as a three-player non-cooperative game. Use two

V ({1}) = V ({2}) = V ({3}) = 8 (1)

3. Identify the core of the coalitional game

belong to the core. These set of inequalities is not contradictory, it is

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