NASH EQUILIBRIUM

GAME THEORY | A2 | FRANCIS

VOCABULARY

STRATEGY: TO TALK OR NOT TO TALK

DOMINANT STRATEGY: THE BEST STRATEGY REGARDLESS OF OTHER PLAYER ATTITUDE
 NASH EQUILIBRIUM IS NOT THE SAME
THING AS THE EXPECTED VALUE
1. Pay-off matrix

silent talk

A=1 A=0
silent
B B=1 B=5

A=5 A=2
talk
B=0 B=2
 A PAY-OFF

1.A is always better-off talking

A
Pay-off when B is silent
silent talk

A=1 A=0
silent
B B=1 B=5

A=5 A=2
talk
B=0 B=2

Pay-off when B is talking

2.A is always better off when he speaks

 1. B PLAYER

1. Here is the pay-off for B when A remains silent

silent talk

A=1 A=0
silent
B B=1 B=5

A=5 A=2
talk
B=0 B=2

2. Here talking comes with a smaller costs

 1. B PLAYER

1. Here is the pay-off for B when A rats him out

silent talk

A=1 A=0
silent
B B=1 B=5

A=5 A=2
talk
B=0 B=2

2. Here again talking come with a smaller cost

WRAP UP

• Nash Equilibrium is found by comparing strategies ( you need to freeze one

player in one strategy and consider the 2 strategies for the other player)
• Now you can solve more complex cases
• Let’s practice
 ASYMMETRIC MATRICES
• B is a repeat offender, even if he talks when A remains silent it
takes 3 years
• If A & B talk, B gets 4 years and A gets 2.

silent talk

A=1 A=0
silent
B B=1 B=5

A=5 A=2
talk
B=3 B=4
 A PAY-OFF
This is an outcome
1.A is always better-off talking

silent talk

A=1 A=0
silent
B B=1 B=5

A=5 A=2
This is a strategy
talk
B=3 B=4

2.A is always better off when he speaks

 A PAY-OFF

1.A is always better-off talking

A
Pay-off when B is silent
silent talk

A=1 A=0
silent
B B=1 B=5

A=5 A=2
talk
B=3 B=4

Pay-off when B is talking

2.A is always better off when he speaks

 1. B PLAYER

1. Here is the pay-off for B when A remains silent

silent talk

A=1 A=0
silent
B B=1 B=5

A=5 A=2
talk
B=3 B=4

2. B is better off by remaining silent when A is silent

 1. B PLAYER

1. Here is the pay-off for B when A rats him out

silent talk

A=1 A=0
silent
B B=1 B=5

A=5 A=2
talk
B=3 B=4

2. B is better off if he talks when A talks

THERE IS NO NASH EQUILIBRIUM IN THIS
CASE!

• A is still better off talking regardless of B’s behaviour

• B is better off when he talks if A talks but he would be better off if he
remains silent when A remains silent
EXAMPLES:

• Until 2000’s hard liquor (whisky, bourbon…) where not advertising, they
were in a cooperative equilibrium
• Then they broke the equilibrium and start commercial war
• Find other examples
PRACTICE
• Another well-example is the Ad dilemma.
• Commercials have a cost, it works better if only one company uses it. If they
both use it, consumers will not change their habits
• See the payoff matrix below

Advertise No Ad

A=10 A=5
Advertise
B B=10 B=15

A=15 A=12
No Ad
B=5 B=12
PRACTICE: ASYMMETRIC PAY-OFF
MATRIX (FOR REFERENCE ONLY)
• Now companies have different pay-offs.
• One company may decide to engage in a big commercial campaign
• The second company may mitigate the loss

Advertise No Ad

A=12 A=10
Advertise
B B=10 B=15

A=20 A=10
No Ad
B=5 B=10

• Is there a Nash equilibrium? If yes which one?

PRACTICE: WELFARE SYSTEM

• All players have $100

• Each players decides how much he/she puts in the game {$0, $10}
• The bank/government doubles the amount and divides it equally between all
players
• 5 rounds or more if necessary
• Who has the most money?