GAME THEORY: ANALYSIS OF

STRATEGIC THINKING
Exercises on Nash Equilibrium and Mixed
Equilibrium
Pierpaolo Battigalli
Bocconi University
A.Y. 2006-2007

Abstract
The number of stars denotes the di¢ culty of the exrercise:
(*) easy
(**) medium
(***) di¢ cult

Exercise 1. (*) Consider the following Bertrand duopoly: the demand

function is D(p) = 1 p, …rms have the same linear cost function with marginal
(and average) cost equal to c < 1. Each …rm chooses its price without any
production constraint (suppose that production is made to order and the …rm
commits itself to meet each order at the price it has chosen). Prices are chosen
simultaneously. If prices are di¤erent, all the customers buy from the cheaper
…rm; if prices are equal, each …rm sells to half of the customers.
(1) Represent this model as a non-cooperative static game, taking care of
writing the payo¤ functions correctly.
(2) Write the reaction correspondences (i.e. the best reply correspondence
to deterministic conjectures) and verify that, for some prices of rival …rm i,
…rm i has no best response.
(3) Find out the only Nash equilibrium and verify that the equilibrium price
is a weakly dominated action.

Exercise 2 Consider a symmetric Cournot duopoly. Assume that the inverse

demand function is equal to:

P (Q) = maxf0; a bQg

where Q = q1 + q2 . Assume further that each …rm has constant marginal costs
(and consequently constant average costs). In particular, assume that marginal
cost is equal to c < a.

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 (1) (*) Find the quantity that a monopolist would produce in such a market
and denote this quantity with QM .
(2) (*) Represent this Cournot duopoly as a non-cooperative game static
game. Find the reaction function (i.e. best response to deterministic conjec-
tures) of each …rm. Is the restriction to deterministic conjectures without loss of
generality? [Hint: Think of something you have proved in the previous problem
sets].
(3) (*) Is the game symmetric? Does it have a symmetric Nash equilibrium?
Find the Cournot-Nash equilibrium (i.e. the Nash equilibrium of this game)
(4) (**) Consider a generic …rm i. Can any qi > QM be rational for …rm i?
[Hint: Fix a qi0 > QM . Is qi0 dominated (strictly) by some qi QM ?]
(5) (***) Given the answer to point (4), what action pro…les are consistent
with R \ B (R)? What are the rationalizable action pro…les?
(6) (***) Suppose that a new …rm (say …rm 3) joins the market (then Q =
q1 + q2 + q3 ). Firm 3 has the same production technology of the other two
…rms (thus, the marignal costs of …rm 3 are constant and equal to c). Find
the Cournot-Nash equilibrium of this oligopoly. Find the set of rationalizable
outcomes. [Hint: check whether the set [0; QM ]3 has the best reply property.]

Exercise 3 (***) This exercise is taken from Osborne-Rubinstein pag. 18

Two players are involved in a dispute over an object. The value of the object
to player i is i > 0. Time is modeled as a continuous variable that starts at
0 and runs inde…nitely. Each player chooses when to concede the object to the
other player; if the …rst player to concede does so at time t; the other player
obtains the object at that time. If both players concede simultaneously, the
object is assigned at random, and player i has an expected bene…t of 2i . Time
is valuable: during the dispute each player loses one unit of payo¤ per unit of
time.

Formulate this situation as a strategic game and show that in all Nash equi-
libria one of the players concedes immediately

Esercise 4. (***) Recall that a continuous function of a real variable

f : [a; b] ! R is strictly quasi-concave if and only if f has only one maxi-
mizer x 2 [a; b] and it is strictly increasing in the interval [a; x ] and strictly
decreasing in [x ; b].
Consider a static game G = hN; (Ai ; ui )i2N i such that, for each i, Ai is a
compact interval of the real line, ui (ai ; a i ) is continuous in (ai ; a i ) and for
each …xed a i ; ui (:; a i ) is strictly quasi-concave.
(1) Show that, for each i, the restriction of the best reply correspondence ri
to the set A i (the set of of deterministic conjectures) is a continuous function.
(If you are not able to show this, assume it is true and go to the next point).
(2) Show that for each closed and connected subset A b i A i and for each
action ai 2 Ai , the following statements are equivalent:

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 (2.1) ai is never a best response to b
[any deterministic conjecture a i 2A i
(i.e. ai 2 b b
= ri (A i ), with ri (A i ) := ri (a i )),
a b
i 2A i

(2.2) ai is strictly dominated on the subset A b i by at least one pure ac-

b b
tion ai 2 ri (A i ) (i.e. 9ai 2 ri (A i ), such that 8a i 2 A b i , ui (ai ; a i ) <
b i ), a := min ri (A
ui (ai ; a i )). [Hint: let ai := max ri (A b i ); use strict quasi-
i
concavity to show that show each ai > ai is dominated by ai , and each ai < ai
is dominated by ai .]
(3) Using the results obtained at point (2) show that, under the previous
assumptions, ri (A i ) = ri ( (A i )).

Exercise 5 (*)
Find the (pure and) mixed equilibria of the following game:

a b c
A 2; 0 0; 5 2; 0
B 5; 5 1; 2 0,0
C 0; 0 1; 2 5; 5
D 1; 2 6; 1 1; 2

[Hint: the smart way to do this is to …nd the rationalizable actions …rst.]

Exercise 6 (**) Consider the following game:

S C D
s x; x x; 0 x; 0
m 0; x 2; 0 0,2
g 0; x 0; 2 2; 0

Find the equilibria (pure and mixed), showing how the set of equilibria depends
on the parameter x 2 (0; 2). In particular discuss the di¤erence between the
case x < 1 and the case x > 1:

Exercise 7 (**) Consider the following social dilemma. A pedestrian is hit

by a car and lies injured on the road. There are n people in the vicinity of the
accident. The injured pedestrian requires immediate medical treatment, which
will be forthcoming if at least one of the n people calls for help. Simultaneously
and indipendently, each of the n bystanders decide whether or not to call for help
by dialing with her or his mobile phone. Each bystander obtains an altruistic
bene…t equal to if anyone calls for help. The phone call has a cost equal to c.
That is, if person i calls for help, then s/he obtains the payo¤ c; if person i
does not call but at least one other person calls, then person i gets ; …nally in
none of the n people calls for help, then person i obtains zero. Assume > c.
(1) Represent this situation as a n-player static game.
(2) Find the pure equilibria.
(3) Find the symmetric mixed equilibrium.

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 (4) For the symmetric mixed equilibrium, compute the probability that at
least one person calls for help (i.e. the probability that the pedestrian receives
immediate medical treatment) showing how it depends on the parameter n. Is
this comparative static result surprising?

Exercise 8 (**) Prove that every …nite game has at least one mixed equi-
librium such that all weakly dominated strategies have zero probability.
[Hint: Let G be the original game and G0 be the game obtained by deletion
of weakly dominated strategies, what is the relationship between equilibria of
G0 and equilibria of G?]

Exercise 9 (***) This exercise is taken from the Osborne-Rubinstein text-

book pag. 36.
Player 1 and player 2 each choose a number in the set f1; 2; :::; Kg. If the
players choose the same number then player 2 pays 1 Euro to player 1; otherwise
no payment is made. Each player maximizes his expected monetary payo¤. Does
this game have a Nash equilibrium? Does it have a mixed equilibrium? If yes,
…nd it. Is it unique?

Esercise 10 (***, optional)

This exercise is taken from a paper by J. Nash (Annals of Mathematics,
1951)
The Brower’s …xed point theorem states that:
Theorem: Let D Rm be a convex and compact set and let f : D ! D be
a continuous function. Then f has a …xed point, i.e. 9x 2 D such that x = f (x).
(Note that Kakutani’s …xed point Theorem is a generalization of Brower’s
theorem). Use this theorem to prove the existence of a mixed equilibrium in
every …nite game.
[Hint: consider the following function:
Y Y
f = fi1 ; :::; fimi i2N : (Aj ) ! (Aj )
j2N j2N

where
k k
i + max 0; (ui (ei ; i) ui ( ))
fik ( ) = P m=mi m ;
1 + m=1 max [0; (ui (ei ; i) ui ( ))]
is a mixed action pro…le, (eki ; i ) is a mixed pro…le obtained from if player
i chooses pure action aki 2 Ai = fa1i ; :::am k
i g with probability 1 (ei 2 R
i mi
is the
unit vector with 1 in place k and 0 elsewhere).]

Esercise 11 (***, optional)

This exercise is taken from a paper by Aumann and Brandenbuger (Econo-
metrica, 1995) and is based on a simple, but important observation: in a two-
player game a probability measure on the actions of player i can be interpreted
both as a conjecture of player j 6= i on the actions of i and as a mixed action

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of i. The exercise is conceptual. It is based on the understanding of abstract
de…nitions and on some basic results about best replies.
Suppose that each player i in a …nite two-player game is characterized by
two variables: his action ai and his probabilistic beliefs about (1) the action of
j and (2) the conjecture of j. The conjecture of i on the action of j is obtained
from those probabilistic beliefs by computing marginal distributions.
More formally, the state of player i is a pair si = (ai ; i ) 2 Ai (Aj (Ai )).
A state is a pair of states for the two players, i.e. an element s = (a1 ; 1 ; a2 ; 2 ) 2
A1 (A2 (A1 )) A2 (A1 (A2 )). The conjecture of i in state
s = (a1 ; 1 ; a2 ; 2 ) is the marginal probability measure is =margAj i , that is
i i j
s (aj ) = (a0j ; ) 2 Aj (Ai ) : a0j = aj :
j
Player i in state s = (a1 ; 1 ; a2 ; 2 ) is certain that the conjecture of j is if
n j
o
i
(aj ; j ) 2 Aj (Ai ) : j = = 1.

Analogously we say that in state s = (a1 ; 1 ; a2 ; 2 ) player i is certain that j is

rational if:
i
(aj ; j ) 2 Aj (Ai ) : aj 2 rj ( j ) = 1.
Show that, if in state s = (a1 ; 1 ; a2 ; 2 ) each player i is certain that j’s
conjecture is js and that his opponent is rational, than the pair of conjectures
( 2s ; 1s ) 2 (A1 ) (A2 ) is a mixed equilibrium.