Buying Optimal Payoffs in Bi-Matrix Games

Anshul Gupta and Sven Schewe
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Anshul Gupta: Department of Computer Science, University of Liverpool, Liverpool L69 3BX, UK
Sven Schewe: Department of Computer Science, University of Liverpool, Liverpool L69 3BX, UK

Games, 2018, vol. 9, issue 3, 1-36

Abstract: We consider non-zero sum bi-matrix games where one player presumes the role of a leader in the Stackelberg model, while the other player is her follower. We show that the leader can improve her reward if she can incentivise her follower by paying some of her own utility to the follower for assigning a particular strategy profile. Besides assuming that the follower is rational in that he tries to maximise his own payoff, we assume that he is also friendly towards his leader in that he chooses, ex aequo, the strategy suggested by her—at least as long as it does not affect his expected payoff. Assuming this friendliness is, however, disputable: one could also assume that, ex aequo, the follower acts adversarially towards his leader. We discuss these different follower behavioural models and their implications. We argue that the friendliness leads to an obligation for the leader to choose, ex aequo, an assignment that provides the highest follower return, resulting in ‘friendly incentive equilibria’. For the antagonistic assumption, the stability requirements for a strategy profile should be strengthened, comparable to the secure Nash equilibria. In general, no optimal incentive equilibrium for this condition exists, and therefore we introduce ε -optimal incentive equilibria for this case. We show that the construction of all of these incentive equilibria (and all the related leader equilibria) is tractable.

Keywords: bi-matrix games; Nash equilibrium; leader equilibrium; secure incentive equilibrium (search for similar items in EconPapers)
JEL-codes: C C7 C70 C71 C72 C73 (search for similar items in EconPapers)
Date: 2018
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