Backward induction in presence of cycles

TL;DR

This paper extends backward induction to cyclic directed graphs in multi-stage games, introducing a new class called DGMS games and analyzing the properties and limitations of the modified algorithm.

Contribution

It introduces the concept of DGMS games, extending backward induction to cyclic graphs, and analyzes the algorithm's properties and limitations in finding Nash equilibria.

Findings

The modified algorithm always finds a Nash equilibrium for 2-player games.

In multi-player games, the algorithm may not produce a Nash equilibrium.

The algorithm guarantees a subgame perfect equilibrium only in zero-sum cases.

Abstract

For the classical backward induction algorithm, the input is an arbitrary $n$-person positional game with perfect information modeled by a finite acyclic directed graph (digraph) and the output is a profile $(x_1, \ldots, x_n)$ of pure positional strategies that form some special subgame perfect Nash equilibrium. We extend this algorithm to work with digraphs that may have directed cycles. Each digraph admits a unique partition into strongly connected components, which will be treated as the outcomes of the game. Such a game will be called a {\em deterministic graphical multistage}(DGMS) game. If we identify the outcomes corresponding to all strongly connected components, except terminal positions, we obtain the so-called {\em deterministic graphical}(DG) games, which are frequent in the literature. The outcomes of a DG game are all terminal positions and one special outcome $c$ that is assigned to all infinite plays. We modify the backward induction procedure to adapt it for the DGMS games. However, by doing so, we lose two important properties: the modified algorithm always outputs a {\em Nash equilibrium} (NE) only when $n = 2$ and, even in this case, this NE may be not {\em subgame perfect}. (Yet, in the zero-sum case it is.) The lack of these two properties is not a fault of the algorithm, just (subgame perfect) Nash equilibria in pure positional strategies may fail to exist in the considered game. {\bf Keywords:} deterministic graphical (multistage) game, game in normal and in positional form, saddle point, Nash equilibrium, Nash-solvability, game form, positional structure, directed graph, digraph, directed cycle, acyclic digraph.