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Lectures 12-13: Incomplete Information Static Case

This document provides an overview of game theory concepts related to incomplete information. It begins with examples of Bayesian games where one player has private information about their type that is unknown to others. It then defines Bayesian Nash equilibrium as a Nash equilibrium where players maximize expected utility based on beliefs over other players' private types. The document concludes by discussing mixed strategies in Bayesian games and providing an example equilibrium analysis of a stag hunt game with privately known types.

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90 views8 pages

Lectures 12-13: Incomplete Information Static Case

This document provides an overview of game theory concepts related to incomplete information. It begins with examples of Bayesian games where one player has private information about their type that is unknown to others. It then defines Bayesian Nash equilibrium as a Nash equilibrium where players maximize expected utility based on beliefs over other players' private types. The document concludes by discussing mixed strategies in Bayesian games and providing an example equilibrium analysis of a stag hunt game with privately known types.

Uploaded by

gd3000
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lectures 12-13

Incomplete Information
Static Case
14.12 Game Theory
Muhamet Yildiz

Road Map
1. Examples
2. Bayes rule
3. Definitions
1. Bayesian Game
2. Bayesian Nash Equilibrium

4. Mixed strategies, revisited


5. Economic Applications
1. Cournot Duopoly
2. Auctions
3. Double Auction

Incomplete information
We have incomplete (or asymmetric)
information if one player knows something
(relevant) that some other player does not
know.

An Example
Firm

W ork

H ire
Shirk

H igh p
D o not
hire

N ature

Low 1-p

(1, 2)

H ire

(0, 0)
W

W ork
Shirk

D o not
hire

(0, 1)

(1, 1)

(-1, 2)

(0, 0)

The same example


Work

(1, 2)

Shirk

(0, 1)

W
Nature

High p

Hire

hire

Firm

Work

Low
1-p

(1, 1)

W
Shirk

Do not

(-1, 2)

(0, 0)

Another Example Buy

(p, 2-p)

B
Seller

Dont

High 0.5

Buy

Nature

Low .5

What would you ask


if you were to choose
p from [0,4]?

Dont

Buy

(0, 0)
(p,2-p)

(0, 0)
(p, 1-p)

p
Dont
p

(0,0)

Buy

(p, 1-p)

Dont

(0, 0)

Same Another Example


Buy

(p, 2-p)

B
High 0.5
Dont

Nature

Buy

Low .5

Seller
Nature High 0.5

What would you ask


if you were to choose
p from [0,4]?

Dont

Buy
Dont

Low .5

(0, 0)
(p,2-p)

(0, 0)
(p, 1-p)

(0,0)

Buy

(p, 1-p)

Dont

(0, 0)

Bayes Rule
Prob(A and B)
Prob(A|B) =
Prob(B)
Prob(A and B) = Prob(A|B)Prob(B) = Prob(B|A)Prob(A)

Prob(B|A)Prob(A)
Prob(A|B) =
Prob(B)

Example
Work

p
Success
1-p

Prob(Work|Success) =
p/[p + (1)(1-p)]
Prob(Work|Failure) =
(1-)p/[(1p) + (1)p]

1-p
Shirk
1

Failure

P(W|S)

0.9
0.8

P (w|S ),P (W|F)

0.7
0.6
0.5

P(W|F)

0.4
0.3
0.2
0.1
0

0.2

0.4

0.6

0.8

Bayesian Game (Normal Form)


A Bayesian game is a list
G = {A1,,An;T1,,Tn;p1,,pn;u1,,un}
where
Ai is the action space of i (ai in Ai)
Ti is the type space of i (ti)
pi(t-i|ti) is is belief about the other players
ui(a1,,an;t1,,tn) is is payoff.

An Example
Firm

Work

(1, 2)

Hire
Shirk

High p

(0, 1)

Do not (0, 0)
hire

Nature

Low 1-p

Hire

Work
Shirk

Do not
hire

TFirm={tf};
TW = {High,Low}
AFirm = {Hire, Dont}
AW = {Work,Shirk}
pF(High) = p
pF(Low) = 1-p

(1, 1)

(-1, 2)

(0, 0)

Bayesian Nash equilibrium


A Bayesian Nash equilibrium is a Nash equilibrium of
a Bayesian game.
Given any Bayesian game G =
{A1,,An;T1,,Tn;p1,,pn;u1,,un}
a strategy of a player i in a is any function si:Ti Ai;
A strategy profile s* = (s1*,, s1*) is a Bayesian Nash
equilibrium iff si*(ti) solves

max u (s (t ),..., s (t ), a , s (t ),..., s (t ); t )p (t


ai Ai

t i T i

*
1

*
i 1

i 1

*
i +1

i +1

*
n

| ti )

i.e., si* is a best response to s-i*.

An Example
Firm

Work

(1, 2)

Hire
Shirk

High p

(0, 1)

Do not (0, 0)
hire

Nature

Low 1-p

Hire

Work
Shirk

Do not
hire

(0, 0)

TFirm={tf};
TW = {High,Low}
AFirm = {Hire, Dont}
AW = {Work,Shirk}
pF(High) = p >1/2
pF(Low) = 1-p

(1, 1)

(-1, 2)

sF* = Hire,
sF* (High) = Work
sF* (Low) = Shirk
Another equilibrium?

Stag Hunt, Mixed Strategy

(2,2)

(4,0)

(0,4)

(6,6)

Mixed Strategies
t and v are iid with uniform
distribution on [,].
t and v are privately known by
1 and 2, respectively, i.e., are
types of 1 and 2, respectively.
Pure strategy:
2+t,2+v 4+t,0
s1(t) = Rabbit iff t > 0;
s2(v) = Rabbit iff t > 0.
0,4+v
6,6
p = Prob(s1(t)=Rabbit|v) =
Prob(t > 0) = 1/2.
U1(R|t) = t +2q+4(1-q) = t + 4 2q q = Prob(s2(v)=Rabbit|t) =
U1(S|t) = 6(1-q);
1/2.
U1(R|t) > U1(S|t) t+42q > 6(1-q)
t > 6-6q+2q-4 = 2 4q = 0.

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