Managerial Decision Making

Recitation class

Luiss University

Instructor: Luca Vitali [email protected]

Teaching Assistant: Diletta Topazio [email protected]

1)
Determine which strategies are dominated in the following normal form
games:

1) For player 1: B strictly dominates A

so, we have 𝑅! = 𝐵 × 𝐿, 𝑅
2) For player 2: L strictly dominates R
The set of rationalizable strategy profiles thus consists of only strategy B
for player 1 and only strategy L for player 2; it is the set 𝑅 " = 𝐵, 𝐿
No strategy strictly dominates any other one for each
player, so the set of rationalizable strategy profiles
is 𝑅 = 𝑈, 𝐷 × 𝐿, 𝑅

For player 2: L strictly dominates R

so, we have 𝑅! = 𝑅 = 𝑈, 𝑀, 𝐷 × 𝐿, 𝐶
Then, for player 1 no mix can be found for any
given strategy to be strictly dominated
 1) For player 1: D is strictly dominated by a mix of U
and M, so we have 𝑅! = 𝑈, 𝑀 × 𝑋, 𝑌, 𝑍
2) For player 2: Z is strictly dominated by a mix of X
and Y, so we have 𝑅 " = 𝑈, 𝑀 × 𝑋, 𝑌
3) For player 1: M is strictly dominated by U, so we
have 𝑅 # = 𝑈 × 𝑋, 𝑌
4) For player 2: Y is strictly dominated by X

The set of rationalizable strategy profiles thus consists of only strategy U for
player 1 and only strategy X for player 2; it is the set 𝑅 = 𝑈, 𝑋
 1) For player 1:
𝑢! 𝜎! , 𝑋 = 6𝜎!
𝑢! 𝜎! , 𝑌 = 4𝜎! + 4 1 − 𝜎! = 4
𝑢! 𝜎! , 𝑍 = 6 1 − 𝜎! = 6 − 6𝜎!

!
𝑢! 𝜎! , 𝑋 > 𝑢! 𝐷, 𝑋 6𝜎! > 2 𝜎! >
#
"
𝑢! 𝜎! , 𝑍 > 𝑢! 𝐷, 𝑍 6 − 6𝜎! > 2 𝜎! <
#
! "
so, if < 𝜎! <
# #
D is strictly dominated by a mix of 𝑈 and 𝑀 and we have 𝑅! = 𝑈, 𝑀 × 𝑋, 𝑌, 𝑍
 2) For player 2:
𝑢" 𝜎! , 𝑈 = 3𝜎! + 1 − 𝜎! = 1 + 2𝜎!
𝑢" 𝜎! , 𝑀 = 𝜎! + 4 1 − 𝜎! = 4 − 3𝜎!

!
𝑢" 𝜎! , 𝑈 > 𝑢" 𝑈, 𝑍 1 + 2𝜎! > 2 𝜎! > "
#
𝑢" 𝜎! , 𝑀 > 𝑢" 𝑀, 𝑍 4 − 3𝜎! > 0 𝜎! < $
! #
so, if < 𝜎! <
" $
𝑍 is strictly dominated by a mix of 𝑋 and 𝑌 and we have 𝑅 " = 𝑈, 𝑀 × 𝑋, 𝑌,
3) For player 1:
𝑀 is dominated by 𝑈
so, we have 𝑅 # = 𝑈 × 𝑋, 𝑌

4) For player 2:
𝑌 is dominated by 𝑋
so, The set of rationalizable strategy profiles
thus consists of only strategy U for player 1 and
only strategy X for player 2.
It is the set 𝑅 = 𝑈, 𝑋
1) For player 2: X is strictly dominated by a mix of Y
and Z, so we have 𝑅! = 𝑈, 𝑀, 𝐷 × 𝑌, 𝑍
2) For player 1: U is strictly dominated by D
so, we have 𝑅 " = 𝑀, 𝐷 × 𝑌, 𝑍
3) For player 2: Y is strictly dominated by Z
so, we have 𝑅 # = 𝑀, 𝐷 × 𝑍
4) For player 1: D is strictly dominated by M

The set of rationalizable strategy profiles thus consists of only strategy M for
player 1 and only strategy Z for player 2; it is the set 𝑅 = 𝑀, 𝑍
1) For player 2: 𝑍 is strictly dominated by 𝑋
so, we have 𝑅! = 𝑈, 𝑀, 𝐷 × 𝑊, 𝑋, 𝑌
2) For player 1: 𝑀 and 𝐷 are strictly dominated by 𝑈
so, we have 𝑅 " = 𝑈 × 𝑊, 𝑋, 𝑌
3) For player 2: 𝑊 and 𝑌 are strictly dominated by 𝑋
so, we have 𝑅 # = 𝑈 × 𝑋 = 𝑈, 𝑋

The set of rationalizable strategy profiles thus consists of only strategy U

for player 1 and only strategy X for player 2; it is the set 𝑅 = 𝑈, 𝑋
2)
Find the set of rationalizable strategies for the following game:
1) For player 2, 𝑐 > 𝑑
2) For player 1, 𝑥 > 𝑦
3) For player 2, 𝑐 > 𝑎
4) For player 1, 𝑥 > 𝑤
5) For player 2, 𝑐 > 𝑏
6) For player 1, 𝑥 > 𝑧
𝑅 = 𝑥, 𝑐
but also

1) For player 1, 𝑥 > 𝑦

2) For player 2, 𝑐 > 𝑑, 𝑐 > 𝑏 and 𝑐 > 𝑎
3) For player 1, 𝑥 > 𝑤 and 𝑥 > 𝑧
𝑅 = 𝑥, 𝑐
3) Guided Exercise ch. 6
Suppose two people (1, 2) form a partnership firm. Total revenue depends on
the amount of effort 𝑒% expended on the job by each person and is given by:
𝑟 𝑒! , 𝑒" = 𝑎! 𝑒! + 𝑎" 𝑒"
where 𝑎% is some positive constant. 1 receives 𝑡𝑟 𝑒! , 𝑒" of the firm’s revenue,
with 𝑡 ∈ 0,1 , and 2 gets 1 − 𝑡 𝑟 𝑒! , 𝑒" . Cost of effort is 𝑒%" for each person.
Choice of effort levels is simultaneous and independent and each individual
maximizes the amount of revenue she receives, minus the effort cost.
a) Define the normal form of this game.
b) Using dominance, compute the strategies that the players rationally select
(as a function of 𝑡, 𝑎! , 𝑎" ).
c) Suppose that you could set 𝑡 before the players interact. How would you
set 𝑡 to maximize the revenue of the firm?
a) The game has two players. Each player selects an effort level, which is
greater than or equal to zero. Thus, 𝑆% [0, ∞) for 𝑖 = 1,2. Each player’s
payoff is the amount of revenue he receives, minus his effort cost. Thus,
the payoff functions are
𝑢! 𝑒! , 𝑒" = 𝑡 𝑎! 𝑒! + 𝑎" 𝑒" − 𝑒!"

𝑢" 𝑒! , 𝑒" = 1 − 𝑡 𝑎! 𝑒! + 𝑎" 𝑒" − 𝑒""

b) Each player has a strategy that dominates all others. Foc are:
&'! (! ,(" ∗ +,!
&(
= 𝑡𝑎! − 2𝑒 ! = 0 𝑒! = "
!

&'! (! ,(" !-+ ,"

= 1 − 𝑡 𝑎" − 2𝑒" = 0 𝑒"∗ =
&(" "
Note that although each player’s payoff depends on the strategy of the other
player, a player’s optimal strategy does not depend on the other’s strategy.
The set of undominated strategies is therefore:
+,! !-+ ,"
𝑈𝐷! = 𝑈𝐷" =
" "

c) Because they depend on 𝑎! , 𝑎" and 𝑡, let us write the optimal strategies 𝑒!∗
and 𝑒"∗ as functions of these parameters. The revenue of the firm is then
given by:
𝑎! 𝑒!∗ 𝑎! , 𝑎" , 𝑡 + 𝑎" 𝑒"∗ 𝑎! , 𝑎" , 𝑡
Plugging in the values 𝑒!∗ and 𝑒"∗ , the revenue is:

𝑡𝑎! 1 − 𝑡 𝑎" 𝑎!" 𝑎""

𝑎! + 𝑎" =𝑡 + 1−𝑡
2 2 2 2
The objective function is linear in 𝑡, thus, maximization occurs at a “corner,”
where either 𝑡 = 0 or 𝑡 = 1. If 𝑎! > 𝑎" , then it is best to set 𝑡 = 1; otherwise,
it is best to set 𝑡 = 0.
 ,!"
If 𝑡 = 1, then revenue is
" ,""
If 𝑡 = 0, then revenue becomes "
If instead the firm’s revenue minus the partners’ effort costs is maximized,
then:
"
𝑎!" 𝑡𝑎! 𝑎"" "
1 − 𝑡 𝑎"
𝑡 + 1−𝑡 − −
2 2 2 2
,!"
and, using calculus, the solution is to set 𝑡= ,!" .,""
,!" .,""
In this case revenue is
"
Time 𝑡=1 𝑡=0 𝑎!"
𝑡= "
𝑎! + 𝑎""
Revenue 𝑎!" 𝑎"" 𝑎!" + 𝑎""
2 2 2
4) Determine the following sets of best responses.

! ! !
𝐵𝑅! 𝜃" for 𝜃" = , ,
# # #

! ! ! !#
from U: 𝑢! 𝑈, 𝜃" = 10 + 0+ 3= = 4. 3P
# # # #

! ! !
from M: 𝑢! 𝑀, 𝜃" = 2+ 10 + 6=6
# # #

! ! ! !#
from D: 𝑢! 𝐷, 𝜃" = 3+ 4+ 6= = 4. 3P
# # # #

! ! !
Thus, strategy D represents his best response: 𝐵𝑅! , , = 𝐷
# # #
Determine the following sets of best responses.

! "
𝐵𝑅" 𝜃! for 𝜃! = 0, # , #

! " !/
from 𝐿: 𝑢" 𝜃! , 𝐿 = 0 0 + #
10 + #
3= #
= 5. 3P

! " !$
from 𝐶: 𝑢" 𝜃! , 𝐶 = 0 10 + #
2+ #
6= #
= 4. 6P

! " !/
from 𝑅: 𝑢" 𝜃! , 𝑅 = 0 3 + #
4+ #
6= #
= 5. 3P

! ! !
Thus, strategies 𝐿 and 𝑅 represent his best response: 𝐵𝑅" , ,
# # #
= 𝐿, 𝑅
Determine the following sets of best responses.

0 $
𝐵𝑅! 𝜃" for 𝜃" = , ,0
1 1

0 $ 02
from U: 𝑢! 𝑈, 𝜃" = 10 + 0+ 0 3= = 5. 5P
1 1 1

0 $ 02
from M: 𝑢! 𝑀, 𝜃" = 2+ 10 + 0 6 = = 5. 5P
1 1 1

0 $ #!
from D: 𝑢! 𝐷, 𝜃" = 3+ 4+ 0 6= = 3. 4P
1 1 1

0 $
Thus, strategies 𝑈 and 𝑀 represent his best response: 𝐵𝑅! , , 0 = 𝑈, 𝑀
1 1
Determine the following sets of best responses.

! ! !
𝐵𝑅" 𝜃! for 𝜃! = , ,
# / "

! ! ! !1
from 𝐿: 𝑢" 𝜃! , 𝐿 = #
0+ /
10 + "
3= /
= 3.16P

! ! ! "2
from 𝐶: 𝑢" 𝜃! , 𝐶 = #
10 + /
2+ "
6= #
= 6. 6P

! ! ! !$
from 𝑅: 𝑢" 𝜃! , 𝑅 = #
3+ /
4+ "
6= #
= 4. 6P

! ! !
Thus, strategy 𝐶 represents his best response: 𝐵𝑅" , ,
# / "
= 𝐶
5) Three television stations: RBC, CBC, and MBC simultaneously choose to air
the evening network news program live at 6:00 p.m. or in a delayed broadcast
at 7:00 p.m. Each station’s objective is to maximize its viewing audience. The
following normal-form representation describes the share of total population
watching the news for each station. The payoffs are listed according to the
order RBC, CBC, MBC. Find the set of rationalizable strategies in this game.
Step 1: Find all dominated strategies for each player.
A strategy for players CBC or RBC is dominated only if it is dominated in both of the matrix
sub-games. For example, 6:00 is dominated for RBC in the matrix subgame on the left, but it is not
dominated in the one on the right. Therefore 6:00 is NOT dominated for RBC.
We have that there are no dominated strategies for either CBC or RBC.
To figure out if a strategy is dominated for player MBC we need to check if it yields a lower payoff
for each possible combination of strategies by CBC and RBC. Graphically, this means we need to
make pairwise comparisons between the numbers illustrated in the same colour below:

In each pairwise comparison, choosing 6:00 dominates choosing 7:00 for MBC. Therefore 7:00 is a
dominated strategy for MBC. 𝑅! = 6: 00; 7; 00 × 6: 00; 7; 00 × 6: 00
The reduced game given by looks like:

In this reduced game, 6:00 is dominated by 7:00 for RBC, while CBC has no dominated strategies.
The reduced game is now:

𝑅" = 7; 00 × 6: 00; 7; 00 × 6: 00
Players MBC and RBC have a unique strategy in (Namely, 6:00 and 7:00 respectively). This yields a
unique strategy profile which cannot be reduced further. Therefore,
𝑅 = 7, 6, 6
6) Iterative Deletion of (weakly) Dominated Strategies
Consider the following two-player game 2
1 L C R

U 1, 1 0, 1 3, 1

M 1, 0 2, 2 1, 3

D 1, 3 3, 1 2, 2

a) Are there any strictly or weakly dominated strategies?

b) After deleting any strictly or weakly dominated strategies, are there any strictly
or weakly dominated strategies in the “reduced game”?
c) Go back to your argument for deleting in the “first round” and recall what
dominated what and how. Compare this with what was deleted in the “second
round”. Comment on how this might make you a bit cautious when iteratively
deleting weakly dominated strategies?
a) No strictly dominated strategies 2 L C R
1
1. for player 2: R weakly dominates C
U 1, 1 0, 1 3, 1
2. for player 1: D weakly dominates M
We get 2 M 1, 0 2, 2 1, 3
1 L R

U 1, 1 3, 1
D 1, 3 3, 1 2, 2
D 1, 3 2, 2

where for player 2: L weakly dominates R

and for player 1: U weakly dominates D 2
So, after eliminating C, M, R and D, Equilibrium is (U, L) 1 L C

U 1, 1 0, 1
If instead, deletion process starts with M, then R (weakly
dominated by L), we end up with the following matrix, from
which we eliminate U (weakly dominated by D) and C. D 1, 3 3, 1
Here equilibrium is (D, L)