Question 4

N=2 {xi=player1 and xj= Player 2}

Strategies available = underestimate, overestimate

Payoff:

Ui(overestimate, overestimate) or Ui(underestimate, underestimate)=xi ( which is essentially when

both players make the same estimate)

Ui(overestimate , underestimate)= xi- k

Ui(underestimate, over estimate)=xi +k

[Therefore k is the reward for underestimating when your opponent over estimating and the penalty
when one over estimates and his opponent underestimates]
XiE[2,100] ; K>1; so in our case we will let k=2

strategy profile where the our estimate will assume values between {2, 6}

The strategy profile for the game

xi Over estimate Under estimate

2 (0,4) (4,0)
3 (1,5) (5,1)
4 (2,6) (6,2)
5 (3,7) (7,3)
6 (4,8) (8,4)

A. In the asymmetric strategy profile where the 2 players choose different estimates we can show that Nash
equilibrium cannot be established by utilising a payoff matrix. In this payoff matrix let us set player 1’s estimate
at 2 so (xi=2) and player 2’s estimate at 4 so( xj=4)

The payoff matrix

Player 1/player 2 Overestimate Underestimate

Overestimate (-)) (0,6)
underestimate (4,2) (-))

No nash equilibrium
B.Symmetrical strategy profile where both players choose the same estimates and where those estimate that are strictly
larger than 2 cannot have a Nash equilibrium:

Let xi=xj=4

The payoff matrix

Player 1/player 2 Overestimate Underestimate

Overestimate (4,4) (2,6)
underestimate (6,2) (4,4)

IESDS:

ROUND 1:

Player 1:

No Strictly dominated strategies

PLAYER 2:

U2(OVER,OVER)>U2(UNDER,OVER) (4>2)

U2(OVER,UNDER)>U2(UNDER,UNDER)(6>4)

Overestimating strictly dominates under estimating for player 2

Pay off matrix after IESDS

Player1/player 2 Over estimate

overestimate (4,4)
underestimate (2,6)

Optimization of payoffs: In order for player 2 to maximize his payoff given that the only strategy available to him is to
overestimate after IESDS would be to hope that player 1 underestimates (U2(OVER,UNDER)) However player 1 believes
that player 2 will overestimate so it would be in his maximising payoff strategy to overestimate as well he would want to
pick U1(OVER,OVER)

Which means max payoff given the constraints of your opponents strategies: U1(Over, Over) IS NOT EQUAL TO

U2(Over, under)

Therefore There is NO NASH EQUILIBRIUM WHEN ESTIMATES ARE STRICTLY LARGER THAN 2
Show that the symmetric strategy profile in which both travellers submit the same estimate (x 1, x2) =
(2, 2) is the unique pure strategy Nash equilibrium.

The payoff matrix

Player 1/player 2 Overestimate Underestimate

Overestimate (2,2) (0,4)
underestimate (4,0) (2,2)

IESDS:

ROUND 1:

Player 1:

U1 (under,over)>U1(over,over) (4>2)

U1 (UNDER, UNDER)>U1 (OVER, UNDER) (2>0)

Underestimating strictly dominates overestimating for player 1

PLAYER 2:

U2 (UNDER, OVER)>U2 (OVER, OVER) (4>2)

U2 (OVER, UNDER)>U2 (UNDER, UNDER)(2>0)

Underestimating strictly dominates overestimating for player 2

Pay off matrix after IESDS

The payoff matrix

Player 1/player 2 Overestimate Underestimate

Overestimate (2,2) (0,4)
underestimate (4,0) (2,2)

Therefore Nash equilibrium after IESDS

(X1,X2)= (2,2)