MBA, P1 Sep–Oct 2012
Prices & Markets
Timothy Van Zandt
Preparation for Session 12
Static Games
Summary
FPM reading.
Article.
Movie clip.
Deliverables.
Chapter 12.
Conrail Fight: Neither Side Can Afford to Be Loser.
From A Beautiful Mind. See below.
Exercises 12.2 and 12.4a.
[Use the solution sheet at the end of this guide.]
Reading guide to FPM Chapter 12
In class, we will focus on discrete games and main concepts rather than the kinds of
calculations that are needed for the partnership game.
The partnership game is a warm up for Session 13, which can be heavy.
I will auction off something in class, so come prepared to bid. Think about Exercise
12.1 in advance.
Conrail Fight: Neither Side Can Afford to Be Loser
How can we analyze the shareholders’ tender decisions using game theory?
Movie clip
A clip from the movie, A Beautiful Mind, is on the course website under Session 12.
This movie is based loosely on an autobiography of John Nash. (Sorry folks, this
clip is not politically correct. Let’s blame it on 1950s United States, which is when and
where it takes place.) Your task? To come up with a simple game that models the
situation. (Just do it for 2 players.) I know of two reasonable interpretations of the
situation and corresponding games that model them. In class, we’ll look at the clip and
see what you have come up with.
Study guide
Everything is important. The main ideas are:
1. Best responses.
2. Dominant strategy.
3. Nash equilibrium.
For discrete games, these concepts are mechanical to calculate. That said, it is easy
to make mistakes if you work too quickly through examples (because the payoff matrix
lists the payoffs of both players and you need to keep the payoffs separate).
f
Prices & Markets • Preparation for Session 12
3
Name:
Section:
You can mark your solutions to Exercises 12.2 and 12.4.a here, to detach and hand
in at Session 12.
Exercise 12.2. Consider a game between players A and B; you are player B. The actions and your payoffs are shown in Table E12.1.
Table E12.1
Player B
I
W
X
Player A
Y
Z
II

III













IV


The purpose of using this large game with no story is to drive home how simple
and mechanical an exercise it is to find best responses in a discrete game. For example,
to find your best response to Y , you just compare the four numbers in the row for
action Y . For each action by player A, circle the payoff for your action that is the best
response.
Exercise 12.4.a.
Table E12.2 shows another game without telling you the story that lies behind it.
Table E12.2
Player B
Y
W
Player A
Z
−
−



X



Find the Nash equilibrium (equilibria) of the game.