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Institute- SCMHRD
Course: MBA – HR
Subject: Game Theory for Strategic Thinking
PRN: 20020341208
Name of Student: Meghna Sharma
Date: 12-01-2022
Day: Wednesday
Timing: 14.30 To 16.30
Maximum Marks: 25 Marks
Faculty: S.R. Phadke (7083631761/9860177962)
Submission at: [email protected]
 ASSIGNMENT-1

NASH EQUILIBRIUM
Nash equilibrium is a concept within game theory where the optimal outcome of a game is
where there is no incentive to deviate from the initial strategy. More specifically, the Nash
equilibrium is a concept of game theory where the optimal outcome of a game is one
where no player has an incentive to deviate from their chosen strategy after considering an
opponent's choice. Overall, an individual can receive no incremental benefit from changing
actions, assuming other players remain constant in their strategies. A game may have
multiple Nash equilibria or none at all.
The reason why Nash equilibrium is considered such an important concept of game theory
relates to its applicability. The Nash equilibrium can be incorporated into a wide range of
disciplines, from economics to the social sciences. To quickly find the Nash equilibrium or
see if it even exists, reveal each player's strategy to the other players. If no one changes
their strategy, then the Nash equilibrium is proven.
Nash equilibrium is often compared alongside dominant strategy, both being strategies of
game theory. The Nash equilibrium states that the optimal strategy for an actor is to stay
the course of their initial strategy while knowing the opponent's strategy and that all
players maintain the same strategy, as long as all other players do not change their
strategy. Dominant strategy asserts that the chosen strategy of an actor will lead to better
results out of all the possible strategies that can be used, regardless of the strategy that the
opponent uses. For example - Consider the following two businesses: Company A and
Company B. Both companies want to know if a fresh advertising campaign for their
products should be launched. If both businesses begin advertising, each will gain 100 new
customers. If just one firm decides to advertise, that company will gain 200 new clients,
while the other company will gain none. If neither company decides to advertise, neither
will attract new clients. The payoff table is below:
Company B
Advertis
Don't Advertise
e
Advertise 100/100 200/0
Compan
Don't
yA 0/200 0/0
Advertise

Company A should advertise its products because the strategy provides a better payoff than
the option of not advertising. The same situation exists for Company B. Thus, the scenario
when both companies advertise their products is a Nash equilibrium.

Mixed strategy Nash Equilibrium

A mixed strategy Nash equilibrium involves at least one player playing a randomized strategy
and no player being able to increase his or her expected payoff by playing an alternate
strategy. A Nash equilibrium in which no player randomizes is called a pure strategy Nash
equilibrium.
Procedures of finding Mixed strategy equilibria: -
 Calculate the set of rationalizable strategies by performing the iterated-dominance
procedure.
 Restricting attention to rationalizable strategies, write equation for each player to
characterize mixing probabilities that makes the other player indifferent between
relevant pure strategies
 Solve these equations to determine equilibrium mixing probabilities.

PRISONERS’ DILLEMMA
The Prisoner's Dilemma describes a situation in which, according to game theory, two players
acting selfishly ultimately end up making suboptimal choices for both. The prisoner's dilemma
shows that simple cooperation is not always in our best interests. Helps understand the factors
that drive the balance between cooperation and competition in business, political and social
settings. This concept was explained at the very beginning of the chapter with the help of an
example of two rival mail-order firms Rainbow’s End & B. B. Lean that sell clothes and their
winter catalog pricing decisions which they must make simultaneously and without knowing
the other firm’s choices.
This situation, i.e., simultaneous move game has a special feature known as the dominant
strategy, where player is said to have a dominant strategy if that same strategy is better for
him than all of his other available strategies no matter what strategy or strategy combination
the other player or players choose. So, in case if a player has a dominant strategy, the simple
rule would be to use it to maximize gains. But if only one player has a dominant strategy or if
none has, the move choice depends on what the other person is choosing. In the general
sense, two strategies are available to each player – Cooperate and Cheat.
Another strategy is TIT FOR TAT, which is a variation of the eye for an eye rule of behavior- Do
unto others as they have done to you. This strategy begins with cooperation in the first period
and from then on mimics the rival’s action from the previous period. However, the problem
with this strategy is that any mistake echoes back and forth i.e. One side punishes the other for
defection, which triggers a chain reaction. The opponent responds to the punishment by
counterattacking. This answer requires a second punishment. Strategy does not accept
punishment without retaliation.
More recent experiments & research on prisoner’s dilemma had the below mentioned
findings:
 Cooperation occurs significantly often, even when each pair of players meets only once.
On average, almost half of the players choose the cooperative action.
 People engage in a significant amount of punishment of “social cheaters,” and that the
prospect of the punishment increases the contributions in the first phase of the game
dramatically. Such punishments seem to be an effective mechanism for achieving
cooperation that benefits the whole group.

These experiments also suggest several preconditions and strategies to achieve successful
cooperation: Detection of cheating: Before cheating can be punished, it must be detected. If
detection is fast and accurate, the punishment can be immediate and accurate. That reduces
the gain from cheating while increasing its cost, and thus increases the prospects for successful
cooperation.
Other preconditions are the nature of the punishment, clarity of the consequences of cheating,
certainty of punishment on defection, the severity of the punishment & repetition.

TEN TALES OF STRATEGY

1. Pick a number – This strategy illustrates that we must take into account the objectives
and strategies of the other players while playing a game. For example - When guessing
a number picked at random, the number isn’t trying to hide. We can take the
engineer’s mindset and divide the interval in two and do the best possible. But if we are
playing a game, then we have to consider how the other player will be acting and how
those decisions will influence our strategy.
2. Winning by losing - The end goal is to help change the way we approach strategic
situations, recognizing that we won’t always have time to analyze every possible
option. Our play will be recognized as impressive if we are able to anticipate all the
different moves before they happened.
3. The hot hand - When a player made his last shot, he was less likely to make his next;
when he missed his previous attempt, he was more likely to make his next. Because the
other side would start to crowd the hot hand player. This could easily lower his
 shooting percentage. And when the defense focuses on that particular player, one of
his teammates is left unguarded and is more likely to shoot successfully.
4. To lead or not to lead - One can imitate as soon as the other has revealed his approach
(as in sailboat racing) or wait longer until the success or failure of the approach is
known (as in computers). The longer wait is more advantageous in business because,
unlike in sports, the competition is usually not winner-take-all. As a result, market
leaders will not follow the upstarts unless they also believe in the merits of their
course.
5. Here I stand – This tale discusses the power of intransigence. It discusses the example
of intransigence of Martin Luther, Charles de Gaulle and Ferdinand de Lesseps. Taking a
firm stand can result in both a success and a loss. It raised the question, “How can one
achieve selective inflexibility?” Although there is no ideal solution, there are various
means by which commitment can be achieved and sustained.
6. Thinning Strategically – This tale describes various weight losing scenarios and portrays
that today’s self wants the future self to diet and exercise. The future self wants the ice
cream and the television. Most of the time, the future self-wins because it gets to move
last. The trick is to change the incentives for the future self so as to change its behavior.
It discusses the strategy to win by cutting off options.
7. Buffett’s Dilemma – It discusses the situation called a prisoners’ dilemma where both
sides are led to take an action that is against their mutual interest.
8. Mix Your Plays – This tale discusses the advantages of mixing plays by rotating the
strategies in an unpredictable manner.
9. Never give a sucker an even bet – This tale tells us that every action someone takes
tells us something about what he knows, and we should use these inferences along
with what we already know to guide our actions.
10. Game theory can be dangerous to your health – This tale tells us that when thinking
strategically, we have to work extra hard to understand the perspective and
interactions of all the other players in the game, including ones who may be silent. We
need to consider what they know, what motivates them and even their thoughts.
GAMES WITH BACKWARD REASONING (BACKWARD INDUCTION)
Backward induction in game theory is an iterative process of reasoning backward in time,
from the end of a problem or situation, to solve finite extensive form and sequential games,
and infer a sequence of optimal actions. At each stage of the game backward induction

determines the optimal strategy of the player who makes the last move in the game. Then,
the optimal action of the next-to- last moving player is determined, taking the last player's
action as given. This process continues backward until the best action for every point in time
has been determined. Effectively, one is determining the Nash equilibrium of each subgame
of the original game.

Solving sequential games with backward induction

Many games involve simultaneous plays, or at least plays in which a player did not know
what strategy the others had followed until after he had made his move. However, many
games are sequential, and if a player knows the strategies used by previous players the game
is one of perfect information. (Remember that such a game is also one of complete
knowledge). Backward induction can be used to solve such games and obtain Nash equilibria.
We can illustrate the point by considering the three person Pay-raise Voting Game.

There are three legislators who have to decide how to vote on a pay raise bill. If they vote
‘yes’, they will face popular backlash, with a negative utility of –b. However, if the pay raise is
approved, there will be a utility of +p, with b<p. The pay raise bill passes as long as at least
two people vote for it. It may be thought that it is best to vote last because then one can see
what the other two did, but a tree lets us see that it is not so. Here the square marked 1
denoted the decision of the first player to vote, those marked 2 the decisions of the second,
and so on. The payoffs are given to the right of every branch. For example, in the topmost
branch (all vote yes) each has a payoff of p-b; in the branch immediately below it (1 and 2
vote yes and 3 votes no) 1’s and 2’s payoffs are p-b and 3’s payoff is p. Let us use regressive
induction starting with the topmost rightmost square, where player 3 must decide whether
to vote yes or no. If she votes yes, her payoff is p-b and if she votes no her payoff is p.
Consequently, we may assume that she will vote no and prune the topmost branch. By the
same reasoning, we may prune the tree with respect to 3’s decisions (As usual we put an x
on the branches which are eliminated). Based on what one may expect 3 to do, 2 makes his
decision. For example, on the topmost square marked 2, we may prune off the ‘yes’ branch
because by choosing that branch 2’s.

BUFFETT’S DILEMMA
In an op-ed promoting campaign finance reform, the Oracle of Omaha, Warren Buffett,
proposed raising the limit on individual contributions from $1,000 to $5,000 and banning all
other contributions. No corporate money, no union money, no soft money. It sounds great,
except that it would never pass. Campaign finance reform is so hard to pass because the
incumbent legislators who have to approve it are the ones who have the most to lose. Their
advantage in fundraising is what gives them job security. How do you get people to do
something that is against their interest? Put them in what is known as the prisoners’
dilemma.

According to Buffett: Well, just suppose some eccentric billionaire made the following offer: If
the bill was defeated, this person—the E.B.—would donate $1 billion in an allowable manner
to the political party that had delivered the most votes to getting it passed. Given this
diabolical application of game theory, the bill would sail through Grad in Kansas had heard
that line.

Consider your options as a Democratic legislator. If you think that the Republicans will
support the bill and you work to defeat it, then if you are successful, you will have delivered
$1 billion to the Republicans, thereby handing them the resources to dominate for the next
decade. Thus, there is no gain in opposing the bill if the Republicans are supporting it. Now, if
the Republicans are against it and you support it, then you have the chance of making $1
billion. Thus, whatever the Republicans do, the Democrats should support the bill. Of course,
the same logic applies to the Republicans. They should support the bill no matter what the
Democrats do. In the end, both parties support the bill, and our billionaire gets his proposal
for free. As a bonus, Buffett notes that the very effectiveness of his plan “would highlight the
absurdity of claims that money doesn’t influence Congressional votes.” This situation is
called a prisoners’ dilemma because both sides are led to take an action that is against their
mutual interest. In the classic version of the prisoners’ dilemma, the police are separately
interrogating two suspects. Each is given an incentive to be the first to confess and a much
harsher sentence if he holds out while the other confesses.
AUCTIONS AND BIDDINGS
An auction is usually a process of buying and selling goods or services by offering them up for
bids, taking bids, and then selling the item to the highest bidder or buying the item from the
lowest bidder. The branch of economic theory dealing with auction types and participants'
behaviour in auctions is called auction theory. The open ascending price auction is arguably the
most common form of auction in use throughout history. Participants bid openly against one
another, with each subsequent bid required to be higher than the previous bid. An auctioneer
may announce prices, bidders may call out their bids themselves or have a proxy call out a bid
on their behalf, or bids may be submitted electronically with the highest current bid publicly
displayed.

English Auction
English auction refers to the process or method of the sale of a single quantity of a product
where the bidding starts with the starting price which is set by the seller of the product and
increases with the continuous bidding from the different buyers until the price is reached at a
level above which there is no further bidding and this price will be the selling price of the
product under the auction.
English auction is the auction process under which one quantity of a product is listed for sale.
Under this method, all the bidders are aware of each other, and the bids are placed openly in
front of everyone. The process starts with the declaration of the opening bid or the reserve
price, which the seller of the product sets. After this, the interested bidders start placing their
respective bids in an ascending order i.e.- the next bid should be higher than the previous
bidders’ price. This process continues until there is a bid above which any other buyer is not
interested in buying the item. This is the highest bid and the selling price of the product.

Japanese Auction
In the classic “retail” design, the initial price is displayed, and all the bidders who are
interested in buying at that price “enter the arena” (expressing their interest in buying). The
price is then increased either continuously or in increments, and gradually the bidders drop
out as the price rises. The moment only one bidder is left, then that is the price at which they
buy. The Japanese Reverse auction is the business equivalent for procurement purposes. The
price starts high and decreases, and the different bidders (sellers) gradually drop out as the
price decreases.
When the second to last bidder drops out and only one is left, then they are the winners
and are awarded the contract. (Or it could be more than one left, if the intent is to
appoint multiple suppliers).

Vickrey Auction
A Vickrey auction is a sealed-bid auction where bidders submit bids without knowing the
bids of other people. However, as opposed to other sealed-bid auctions, the price paid is
the second- highest bid price and not the winning bid price. In a Vickrey auction, the
individual is bidding their true value and are not trying to assess what everyone else is
going to bid. Therefore, in a Vickrey auction, the individual is bidding the maximum
amount they are willing to pay and are not disadvantaged by it. By utilizing the second-
price mechanism in a Vickrey auction, individuals bid truthfully – individuals are motivated
to bid their maximum value because the individual understands that if their bid wins, they
will only need to pay the second-highest bid value.

Dutch Auction
A Dutch auction is a price discovery process in which the auctioneer starts with the highest
asking price and lowers it until it reaches a price level where the bids received will cover the
entire offer quantity. Alternatively, a Dutch auction is known as a descending price auction or
a uniform price auction. Dutch auctions are appropriate for instances where a large quantity
of an item is being offered for sale, as opposed to just a single item. A Dutch auction is a type
of auction where securities are priced via bids rather than the seller setting the price. In this
scenario, the seller sets a maximum price, which is then lowered until all of the securities
have been bid on. Dutch auctions can have several purposes, one of which is in an initial
public offering (IPO).