Networks: Fall 2015

David Easley & Jon Kleinberg

Homework 2
Due 11:15am, Friday, September 18, 2015

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Reading: The questions below are primarily based on the material in Chapters 6 and 8 of
the book.

(1) In this question we will consider several two-player games. In each payo matrix
below the rows correspond to player As strategies and the columns correspond to player Bs
strategies. The first entry in each box is player As payo and the second entry is player Bs
payo. Both players prefer higher payos to lower payos.
(a) Find all pure (non-randomized) strategy Nash equilibria for the game described by
the payo matrix in Figure 1.

Player A U
D

Player B
L
R
2, 1 1, 3
6, 0 3, 2

Figure 1: The payo matrix for Question (1a).

(b) Find all pure (non-randomized) strategy Nash equilibria for the game described by
the payo matrix in Figure 2.

Player A U
D

Player B
L
R
1, 1 3, 4
4, 2 5, 0

Figure 2: The payo matrix for Question (1b).

(c) Find all Nash equilibria for the game described by the payo matrix in Figure 3.
[Hint: This game has two pure strategy equilibria and a mixed strategy equilibrium. To
find the mixed strategy equilibrium let the probability that player A uses strategy U be p
and the probability that player B uses strategy L be q. As we learned in our analysis of
1

Player A U
D

Player B
L
R
1, 1 3, 3
4, 3 2, 0

Figure 3: The payo matrix for Question (1c).

penalty kicks, if a player uses a mixed strategy (one that is not really just some pure strategy
played with probability one) then the player must be indierent between two pure strategies.
That is the strategies must have equal expected payos. ]

(2) All of our examples of games had only two strategies for each player, but the concept
of Nash equilibrium also applies to games with many strategies for each player. In this
question we will consider a two-player game in which each player has three strategies. A
Nash equilibrium is still a pair of strategies that are best responses to each other. Consider
the game below in which each player has three strategies.

u
Player A m
d

Player
L
M
4, 1 1, 3
1, 3 3, 5
2, 3 2, 4

B
R
1, 2
1, 0
5, 2

Figure 4: Payo Matrix for Question 2

(a) Does either player have a dominant strategy? If so, which player(s)? Explain briefly
(1-3 sentences).
(b) Find all pure strategy Nash equilibria for this game. [Your answer to part (a) should
be helpful in answering this question.]

(3) Companies A and B both consider signing up for cloud computing services, in which
a third-party service will host their data and computing needs.
There are three cloud computing services; lets call them C1 , C2 and C3 . Company A is
unable to use service C3 , so its available options are C1 and C2 ; while company B is unable
to use service C1 , and its available options are C2 and C3 . Both companies are in the final
stages of making a decision, and both are still considering two options (company A considers
C1 and C2 , while company B considers C2 and C3 ). Each company must sign up for cloud
computing service from one of the two options it is considering. Each company wants to
select the least expensive cloud computing service, given whatever cloud computing service
the other company selects.

Here is how the prices for cloud computing services are determined (well write the prices
in simplified units, which you can imagine to be multiples of thousands of dollars):
Service C1 would charge 7 for providing the service to company A. (Recall that C1 is
not an option for company B.)
Service C3 would charge 9 for providing the service to company B. (Recall that C3 is
not an option for company A.)
Service C2 has a dierent pricing plan: it will charge 10 in total regardless of whether
it supports one or both companies. So if only one company chooses C2 , that company
pays the full 10; if both companies choose C2 then they can share the cost and each
pay 5. (That is, how much one company pays for C2 depends on whether the other
has chosen C2 as well.)
(a) Formulate this problem as a game, say who the players are, what their strategies are,
and write down the payo matrix of the resulting game.
(b) Does this game have pure Nash equilibria? If it does, what are all the pure Nash
equilibria?
(c) Does this game have a mixed Nash equilibrium? If it does, find it. Give an explanation
for your answer.

(4) Two identical firms lets call them firm 1 and firm 2 must decide simultaneously
and independently whether to enter a new market and what product to produce if they do
enter the market. Each firm, if it enters, can develop and produce either product A or
product B. If both firms enter and produce product A they each lose ten million dollars. If
both firms enter and both produce product B, they each make a profit of five million dollars.
If both enter and one produces A while the other produces B, then they each make a profit
of ten million dollars. Any firm that does not enter makes a profit of zero. Finally, if one
firm does not enter and the other firm produces A it makes a profit of fifteen million dollars,
while if the single entering firm produces B it makes a profit of thirty million dollars.
You are the manager of firm 1 and you have to choose a strategy for your firm.
(a) Set this situation up as a game with two players, firms 1 and 2, and three strategies
for each firm: produce A, produce B or do not enter.
(b) One of your employees argues that you should enter the market (although he is not
sure what product you should produce) because no matter what firm 2 does, entering and
producing product B is better than not entering. Evaluate this argument.
(c) Another employee agrees with the person in part (b) and argues that as strategy A
could result in a loss (if the other firm also produces A) you should enter and produce B.
If both firms reason this way, and thus enter and produce product B, will their play of the
game form a Nash equilibrium? Explain.
(d) Find all the pure strategy Nash equilibria of this game.

(e) Another employee of your firm suggests merging the two firms so that they are
controlled by a single parent company. In this case, the single parent company would select
strategies for both of the companies and it would receive the profit earned by both of them.
Ignoring whether this merger would be allowed by the regulators, do you think its a good
idea? That is, would the parent company be able to make more profit than the sum of the
profits currently made by the two companies?

(5) Four hundred travelers begin in city A and must travel to city B. There are two
routes between A and B.
Route I begins with a local street from city A to city C; this local street requires a travel
time per traveler in minutes equal to the number of travelers on the street, denoted x, divided
by 10. Route I then ends with a highway from city C to city B which takes 30 minutes of
travel time per traveler regardless of how many travelers use it.
Route II begins with a highway from city A to city D which takes 55 minutes of travel
time per traveler regardless of how many travelers use it. Route II then ends with a local
street from city D to city B; this local street requires a travel time per traveler in minutes
equal to the number of travelers on the street, denoted y, divided by 20.
All roads are one-way roads. The road network is depicted in Figure 5.

C
x/10

30

55

y/20
D

Figure 5:
(a) Travelers simultaneously chose which route to use. Find Nash equilibrium values of
x and y. Briefly describe how you obtained these values.
(b) Now the government builds a new highway directly connecting cities A and B. The
travel time per traveler on this road is 40 minutes regardless of the number of travelers who
use it. Find the new Nash equilibrium and briefly describe how you obtained it.