# Potential game

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In game theory, a game is said to be a potential game if the incentive of all players to change their strategy can be expressed using a single global function called the potential function. The concept originated in a 1996 paper by Dov Monderer and Lloyd Shapley. [1]

Game theory is the study of mathematical models of strategic interaction between rational decision-makers. It has applications in all fields of social science, as well as in logic and computer science. Originally, it addressed zero-sum games, in which one person's gains result in losses for the other participants. Today, game theory applies to a wide range of behavioral relations, and is now an umbrella term for the science of logical decision making in humans, animals, and computers.

In game theory, a player's strategy is any of the options which he or she chooses in a setting where the outcome depends not only on their own actions but on the actions of others. A player's strategy will determine the action which the player will take at any stage of the game.

Lloyd Stowell Shapley was an American mathematician and Nobel Prize-winning economist. He contributed to the fields of mathematical economics and especially game theory. Shapley is generally considered one of the most important contributors to the development of game theory since the work of von Neumann and Morgenstern. With Alvin E. Roth, Shapley won the 2012 Nobel Memorial Prize in Economic Sciences "for the theory of stable allocations and the practice of market design."

## Contents

The properties of several types of potential games have since been studied. Games can be either ordinal or cardinal potential games. In cardinal games, the difference in individual payoffs for each player from individually changing one's strategy, other things equal, has to have the same value as the difference in values for the potential function. In ordinal games, only the signs of the differences have to be the same.

The potential function is a useful tool to analyze equilibrium properties of games, since the incentives of all players are mapped into one function, and the set of pure Nash equilibria can be found by locating the local optima of the potential function. Convergence and finite-time convergence of an iterated game towards a Nash equilibrium can also be understood by studying the potential function.

In game theory, the Nash equilibrium, named after the mathematician John Forbes Nash Jr., is a proposed solution of a non-cooperative game involving two or more players in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy.

## Definition

We will define some notation required for the definition. Let ${\displaystyle N}$ be the number of players, ${\displaystyle A}$ the set of action profiles over the action sets ${\displaystyle A_{i}}$ of each player and ${\displaystyle u}$ be the payoff function.

A game ${\displaystyle G=(N,A=A_{1}\times \ldots \times A_{N},u:A\rightarrow \mathbb {R} ^{N})}$ is:

• an exact potential game if there is a function ${\displaystyle \Phi :A\rightarrow \mathbb {R} }$ such that ${\displaystyle \forall {a_{-i}\in A_{-i}},\ \forall {a'_{i},\ a''_{i}\in A_{i}}}$,
${\displaystyle \Phi (a'_{i},a_{-i})-\Phi (a''_{i},a_{-i})=u_{i}(a'_{i},a_{-i})-u_{i}(a''_{i},a_{-i})}$
That is: when player ${\displaystyle i}$ switches from action ${\displaystyle a'}$ to action ${\displaystyle a''}$, the change in the potential equals the change in the utility of that player.
• a weighted potential game if there is a function ${\displaystyle \Phi :A\rightarrow \mathbb {R} }$ and a vector ${\displaystyle w\in \mathbb {R} _{++}^{N}}$ such that ${\displaystyle \forall {a_{-i}\in A_{-i}},\ \forall {a'_{i},\ a''_{i}\in A_{i}}}$,
${\displaystyle \Phi (a'_{i},a_{-i})-\Phi (a''_{i},a_{-i})=w_{i}(u_{i}(a'_{i},a_{-i})-u_{i}(a''_{i},a_{-i}))}$
• an ordinal potential game if there is a function ${\displaystyle \Phi :A\rightarrow \mathbb {R} }$ such that ${\displaystyle \forall {a_{-i}\in A_{-i}},\ \forall {a'_{i},\ a''_{i}\in A_{i}}}$,
${\displaystyle u_{i}(a'_{i},a_{-i})-u_{i}(a''_{i},a_{-i})>0\Leftrightarrow \Phi (a'_{i},a_{-i})-\Phi (a''_{i},a_{-i})>0}$
• a generalized ordinal potential game if there is a function ${\displaystyle \Phi :A\rightarrow \mathbb {R} }$ such that ${\displaystyle \forall {a_{-i}\in A_{-i}},\ \forall {a'_{i},\ a''_{i}\in A_{i}}}$,
${\displaystyle u_{i}(a'_{i},a_{-i})-u_{i}(a''_{i},a_{-i})>0\Rightarrow \Phi (a'_{i},a_{-i})-\Phi (a''_{i},a_{-i})>0}$
• a best-response potential game if there is a function ${\displaystyle \Phi :A\rightarrow \mathbb {R} }$ such that ${\displaystyle \forall i\in N,\ \forall {a_{-i}\in A_{-i}}}$,
${\displaystyle b_{i}(a_{-i})=\arg \max _{a_{i}\in A_{i}}\Phi (a_{i},a_{-i})}$

where ${\displaystyle b_{i}(a_{-i})}$ is the best action for player ${\displaystyle i}$ given ${\displaystyle a_{-i}}$.

## A simple example

In a 2-player, 2-strategy game with externalities, individual players' payoffs are given by the function ui(si, sj) = bisi + wsisj, where si is players i's strategy, sj is the opponent's strategy, and w is a positive externality from choosing the same strategy. The strategy choices are +1 and 1, as seen in the payoff matrix in Figure 1.

In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Externalities often occur when a product or service’s price equilibrium cannot reflect the true costs and benefits of that product or service. This causes the externality competitive equilibrium to not be a Pareto optimality.

This game has a potential function P(s1, s2) = b1s1 + b2s2 + ws1s2.

If player 1 moves from 1 to +1, the payoff difference is Δu1 = u1(+1, s2) – u1(–1, s2) = 2 b1 + 2 ws2.

The change in potential is ΔP = P(+1, s2) – P(–1, s2) = (b1 + b2s2 + ws2) – (–b1 + b2s2ws2) = 2 b1 + 2 ws2 = Δu1.

The solution for player 2 is equivalent. Using numerical values b1 = 2, b2 = 1, w = 3, this example transforms into a simple battle of the sexes, as shown in Figure 2. The game has two pure Nash equilibria, (+1, +1) and (1, 1). These are also the local maxima of the potential function (Figure 3). The only stochastically stable equilibrium is (+1, +1), the global maximum of the potential function.

In game theory, battle of the sexes (BoS) is a two-player coordination game. Imagine a couple that agreed to meet this evening, but cannot recall if they will be attending the opera or a football game. The husband would prefer to go to the football game. The wife would rather go to the opera. Both would prefer to go to the same place rather than different ones. If they cannot communicate, where should they go?

In game theory, a stochastically stable equilibrium is a refinement of the evolutionarily stable state in evolutionary game theory, proposed by Dean Foster and Peyton Young. An evolutionary stable state S is also stochastically stable if under vanishing noise the probability that the population is in the vicinity of state S does not go to zero.

 +1 –1 +1 +b1+w, +b2+w +b1–w, –b2–w –1 –b1–w, +b2–w –b1+w, –b2+w Fig. 1: Potential game example
 +1 –1 +1 5, 2 –1, –2 –1 –5, –4 1, 4 Fig. 2: Battle of the sexes(payoffs)
 +1 –1 +1 4 0 –1 –6 2 Fig. 3: Battle of the sexes(potentials)

A 2-player, 2-strategy game cannot be a potential game unless

${\displaystyle [u_{1}(+1,-1)+u_{1}(-1,+1)]-[u_{1}(+1,+1)+u_{1}(-1,-1)]=[u_{2}(+1,-1)+u_{2}(-1,+1)]-[u_{2}(+1,+1)+u_{2}(-1,-1)]}$

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## References

1. Monderer, Dov; Shapley, Lloyd (1996). "Potential Games". Games and Economic Behavior. 14: 124–143. doi:10.1006/game.1996.0044.

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