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1) Hotelling’s Location Game. Recall the “beach vendors”
game we discussed in class, with the following modification:
there are two firms (i=1,2), each one chooses a position
from the set Si= {1, 2,. . . , 10}. The consumers are equally
distributed across these ten positions. Consumers buy from the
firm whose position is closest to theirs. If the two firms are
equidistant from a given position, half of the consumers go to
each firm. The aim of the firms is to maximize their total
sales. Thus, for example, firm 1’s payoff if both firms
choose position 8 is u1 (8, 8) = 50. If instead, firm 1 chooses
7 and firm 2 chooses 8, firm 1’s payoff is u1 (7, 8) = 70.
[Hint: you do not need to write out the full payoff matrix!]

a) Consider the strategy of picking location 1. Find all the

strategies that strictly dominate strategy 1. Explain your
answer. [Hint: try some guesses and see if they work.]
b) Suppose now that there are three firms. Thus, for example,
u1(8, 8, 8) =33.3 and u1 (7, 9, 9) = 73.3. Is strategy 1
dominated, strictly or weakly, by strategy 2? How about by
strategy 3? Explain.
c) Suppose we delete strategies 1 and 10. That is, we rule out
the possibility of any firm choosing either location 1 or 10,
although there are still consumers at those positions. Is
strategy 2 dominated, strictly or weakly, by any other strategy
si in the reduced game? Explain.
2) Penalty Shots Revisited. Player 1 has to take a soccer
penalty shot to decide the game. She can shoot Left,
Middle, or Right. Player 2 is the goalie. He can dive to
the left, middle, or right. Actions are chosen
simultaneously. The payoffs (which here are the
probabilities in tenths of winning) are as follows.
l m r

L 4,6 7,3 9,1

M 6,4 3,7 6,4
R 9,1 7,3 4,6

a) For each player, is any strategy dominated by another

strategy?
b) What probabilities (beliefs) must player 2 attach to player
1’s strategies in order for m to be a best response?
c) For what beliefs about player 2’s strategy is M a best
response for player 1? [Hint: you do not need to draw a
3-dimensional picture!].
d) Suppose player 2 “puts himself in player 1’s shoes” and
assumes that player 1, whatever is her belief, will always
choose a best response to that belief. Should player 2 ever
choose m?
e) Show that this game does not have a (pure-strategy)
Nash Equilibrium.
3) Splitting the Dollar(s). Players 1 and 2 are bargaining
over how to split $10. Each player i names an amount,
si between 0 and 10 for herself. These numbers do not
have to be in whole dollar units. The choices are made
simultaneously. Each player’s payoff is equal to her own
money payoff. We will consider this game under two
different rules. In both cases, if s1 +s2 ≤ 10 then the
players get the amounts that they named (and the
remainder, if any, is destroyed).

a) In the first case, if s1 + s2 > 10 then both players get

zero and the money is destroyed. What are the (pure
strategy) Nash Equilibria of this game?

b) In the second case, if s1 + s2 > 10 and the amounts

named are different, then the person who names the
smaller amount gets that amount and the other person
gets the remaining money. If s1 + s2 > 10 and s1 = s2
then both players get $5 . What are the (pure strategy)
Nash Equilibria of this game?

c) Now suppose these two games are played with the extra
rule that the named amounts have to be in whole dollar
units. Does this change the (pure strategy) Nash
Equilibria in either case?
 Solutions:

1. Hotelling's Location Game. The key to approaching this

problem is to remember that the notion of dominance is all
about my own pay of. For dominance, it never matters
whether I get more or less than my opponent. Notice that all
numbers in this answer are my own pay ofs.

(a) Position 1 is strictly dominated by 2 (in fact, by many other

strategies). This is because my own pay of is higher when I
choose 1 than when I choose 2, and this is true for any
strategy of my opponent. To see this, just consider each
possible position of the other frm. Let's use the notation that
the frst entry is our frm and the second entry is the other frm.
So, for example,
90 = u(2,1) > u
(1,1) =50
50 = u(2,2) > u
(1,2) =10
20 = u(2,3) > u
(1,3) =15
25 = u(2,4) > u
(1,4) =20
30 = u(2,5) > u
(1,5) =25
and so on. A similar reasoning applies to strategies
3,4,5,6,7.Strategies 8,9,10 do not dominate 1. To see this,
suppose the other frm chooses position 7. Then u(1,7) =35
and u(8,7) =30, which means choosing 8 is not better than
choosing 1 for all possible strategies of my opponent.
(b) Strategy 1 is dominated by 2 (although this time only
weakly). To see this for 1 and 2, let xand y(with x; y) be the
positions of the other frms. Start with the easy cases. Then do
the hard cases.
Consider the cases where x>y>2. In these cases, xis irrelevant
when comparing choosing 1 or 2 . Whether our frm chooses 1 or
2, it wins all the consumers at or to the left of its position and
half the consumers between herself and y,so moving to the right
(from 1 to 2) increases its market share. The same analysis
works, more or less, for the case x= y>2. Again, whether our frm
chooses 1 or 2, it wins all the consumers at or to the left of her
position. Now, the fraction of consumers she wins between itself
and yis not cleanly a half, but it is still a fraction less than one.
So, again, moving to the right (from 1 to 2) increases market
share.
This only leaves four cases to check: x=3y=2,x= y=2,x= y=1,and
x=2y=1. It is easy to check each of these:
u(2,2,3)=10=10= u(1,2,3)
u(2,2,2)=33.33 >10 = u(1,2,2)
u(2,1,1)=90 >33.33 = u(1,1,1)
u(2,2,1)=45 >10 = u(1,2,1)
The same reasoning applies to strategy 3 -it weakly
dominates strategy 1.

(c) In this three frm case, even after eliminating 1 and 10,
position 3 does not domi nate position 2. To see this,
consider the case where the other frms choose 4 and 3.
Then:
 u(2,4,3) = 20 > 15 = u(3,4,3).
Strategy 2 is also not dominated by 4. Consider the other
two frms choosing 5 and 3. A similar argument rules out any
other strategy (for example 4) dominating 2.

2. Penalty Shots. This problem is not asking a prediction for

the game. It asks "what must a rational player be thinking
in order to justify the choice of a given action?".

(a) No strategy is dominated. For player 2, each strategy

(l,m,r) is the best response to the corresponding strategy
(L,M,R) by player 1. For player 1, M is not dominated by
L and R because, if player 2 goes r, it is a better to
choose M then R (and likewise for L).

(b) From Player 2's perspective, let PM be the probability that

player 1 chooses M, and PL the probability that player 1
chooses L. Then the probability of player 1 choosing R is
PR =1-PL -PM.In order for m to be abestresponsebyplayer2 it
must be that the expected payof of player 2 choosing m
exceeds that of l and r. In other words, both the following
inequalities must be satisfed:
7PM +3(1-PM ) ; 4PM +6PL +1-
PM -PL
7PM +3(1-PM ) ; 4PM +PL +6(1-
PM -PL).
At this stage, we do not know anything else about player 1,
so it is fne to leave these inequalities as they are. Anyway,
a little bit of simplifcation transforms them into
3 ≤ 6PL +PR
3 ≤ PL +6PR,
which means the probabilities of choosing L and R must be
low enough. In other words, player 2 must be thinking that
M is very likely if she does, in fact, choose m.

(c) Now let Pm be player 1's belief that player 2 chooses m,

and Pz player 1's belief that player 2 chooses l. Clearly,
Pr =1-Pz -Pm. If player 1 chooses M, his expected payof
is 3Pm +6(1-Pm). If he chooses L instead, he gets 7Pm
+4Pz +9(1-Pz -Pm); fnally, choosing R gives him 7Pm
+4(1-Pz -Pm)+9Pz.For M to be a best response given
beliefs (Pz,Pm,Pr), it must be that M does better than
both L and R. Hence we need both
3Pm +6(1-Pm) ≥ 7Pm +4Pz +9(1-
Pz -Pm),and 3Pm +6(1-Pm) ≥ 7Pm
+4(1-Pz -Pm)+9Pz.

Working on these inequalities is more worth it. Solve for Pz

from the frst inequality, and obtain
 Solve for Pz from the second one,

Because both conditions cannot hold at the same time, M is never a

best response for player 1. In other words, there is no mental model
of player 2's behavior that can justify player 1 choosing M.

(d) From part (b), we know Player 2 could justify choosing m. For
example, she could say "I thought player 1 was going to choose M
with very high probability." However, if player 2 understands
player 1 is rational, player 2 will go through the same calculation
as part (c), and realize player 1 will never choose to play M. In
other words, while there are mental models player 2 could build to
explain a choice of m, none of them is consistent with rational
behavior by player 1.

(e) In the following table, the best responses are boldfaced.

Because they do not match, there is no purestrategy Nash
equilibrium.
 l m r

L 4,6 7,3 9,1

M 6,4 3,7 6,4
R 9,1 7,3 4,6
3. Splitting the Dollar.
(a) Nash Equilibrium of this game is any combination of two
numbers that sums up to 10. Any combination that in sum
exceeds 10 destroys value for both players. Any combination
that sums up to a number less than 10 induces each player to
regret not having asked for more.
(b) There is a unique Nash Equilibrium of the game, each player
chooses 5.The logic above suggests (Sl,S2) cannot be an
equilibrium if Sl + S2 < 10. If Sl + S2 ; 10, then the player
with the smaller amount can always get more by picking a
number closer to the higher amount. For example, let's
imagine that players pick 7 and 8, securing payofs of 7 and 3,
respectively. In this situation, player 1 regrets not choosing
7.999. Finally, if both players choose the same number (>5),
each player will regret not picking slightly less. For example,
let's imagine that both players pick 7, securing payofs of 5
each. In this situation, each player would regret not picking
6.999, which yields a higher payof than 5. Answers that
rounded strategies to the closest cent were also fne.
(c) If amounts must be in whole dollars, then there are four
equilibria: (5, 5) , (6, 5) , (5, 6) and (6, 6) . In all four cases,
players get 5 each and cannot improve their payofs further.