Extensive Form Games
With Perfect Information
(Extensions)
Allowing for Simultaneous
Moves
•New type of game where players make simultaneous decisions in a
sequential environment.
•For example, player I moves first choosing C or D. Then players II
and III move simultaneously, each choosing E or F.
•8 Histories of the game: (C, (E,E)), (C, (E,F)), (C, (F,E)), (C,(F,F)),
(D, (E,E)), (D, (E,F)), (D, (F,E)), (D,(F,F)).
Allowing for Simultaneous
Moves
•Definition: An extensive game with perfect information and
simultaneous moves consists of: 1) a set of players, 2) a set of
sequences (terminal histories), 3) actions available to each player at
each possible move in the game, and 4) preferences for each player
over each set of terminal histories (ie, payoffs)
•Definition: A strategy of player i in an extensive game with perfect
information and simultaneous moves is a function that assigns to
each history, h, after which i is one of the players whose turn it is to
move, an action in Ai(h). Ie, the set of actions available to player i
after history h.
Allowing for Simultaneous
Moves
• Example 1: Variant of Battle of the Sexes.
I
Concert
Book
2,2
I
U2 II CP
0,0
U2 3,1
CP
0,0
1,3
Allowing for Simultaneous
Moves
•Nash Equilibrium: Same definition as before.
•Subgame Perfect Nash Equilibrium: Same definition as before.
•What are the NE of the BoS game?
•What are the SPNE of the BoS game?
Allowing for Simultaneous Moves
Player 2
Player 1
U2
CP
Book, U2
2,2
2,2
Book, CP
2,2
2,2
Concert, U2
3,1
0,0
Concert, CP
0,0
1,3
Allowing for Simultaneous Moves
Player 2
Player 1
U2
CP
Book, U2
2,2
2,2
Book, CP
2,2
2,2
Concert, U2
3,1
0,0
Concert, CP
0,0
1,3
Allowing for Simultaneous
Moves
•Nash Equilibia:
•( (Concert,U2), U2)
 ( (player 1 top node, simul. game), player 2 simul. game)
•( (Book,U2), CP)
•( (Book,CP), CP)
•SPNE
•( (Concert,U2), U2)
•( (Book,CP), CP)
In the subgame following player 1 choosing to go to the concert, players must play Nash
Equilibrium strategies. So they have to go to the same concert.
Illustration of Firm Entry
•Consider an industry that is currently monopolized by a single firm
(the incumbent). A second firm, (the challenger) considers entry.
•Demand P(Q) = a - Q.
•Costs C1(q1) = cq1 for the incumbent, C2(q2) = c q2 - f for the
challenger.
•If the challenger stays out, the incumbent gets the market to
himself and obtains the monopoly level of profits.
•If the challenger enters, the firms play the simultaneous Cournot
game.
•What is the SPNE of this game?
Illustration of Firm Entry
•Incumbent monopoly:
* qm = (1/2)(a - c)
 pm = (1/4)(a - c)2
•Cournot equilibrium profits:
p1 = (1/9)(a - c)2
p2 = (1/9)(a - c)2 - f
•So now draw the game in extensive form with simultaneous moves.
Illustration of Firm Entry
In Cournot, each
firm chooses some
positive quantity
so we can’t draw
the game matrix.
Challenger
Stay Out
(0,pm)
Enter
Cournot
Game
( (1/9)(a-c)2-f,
(1/9)(a-c)2 )
Cournot Payoffs
Illustration of Firm Entry
•If fixed costs are small, there is a unique SPNE in which the
challenger enters and firms set their Cournot quantities.
•If fixed costs are large, there is a unique SPNE in which the
challenger stays out the the incumbent captures the whole
market.
•If (1/9)(a - c)2 = f, the game has two SPNE (both of the two
above).
•What about a threat by the incumbent to “flood the market”
upon entry? Is this credible?
•What about Bertrand Competition upon entry? Homework 4!