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14.12 Game Theory Lecture Notes Lectures 15-18: 1 Cournot With Incomplete Information

1) The document summarizes game theory concepts including Cournot competition with incomplete information where one firm's costs are private information. Bayesian Nash equilibrium involves the firms choosing quantity strategies based on their type. 2) Auction examples are provided where bidders have private valuations. In a standard auction, the symmetric linear Bayesian Nash equilibrium strategy is for bids to equal private valuations. 3) A double auction is analyzed where buyers and sellers simultaneously name prices. Bayesian Nash equilibria with fixed or linear pricing strategies are derived.

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80 views6 pages

14.12 Game Theory Lecture Notes Lectures 15-18: 1 Cournot With Incomplete Information

1) The document summarizes game theory concepts including Cournot competition with incomplete information where one firm's costs are private information. Bayesian Nash equilibrium involves the firms choosing quantity strategies based on their type. 2) Auction examples are provided where bidders have private valuations. In a standard auction, the symmetric linear Bayesian Nash equilibrium strategy is for bids to equal private valuations. 3) A double auction is analyzed where buyers and sellers simultaneously name prices. Bayesian Nash equilibria with fixed or linear pricing strategies are derived.

Uploaded by

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Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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14.

12 Game Theory Lecture Notes


Lectures 15-18
Muhamet Yildiz

Cournot with Incomplete Information


Demand:

P (Q) = a Q

where Q = q1 + q2 .
The marginal cost of Firm 1 = c1 ; common knowledge.
Firm 2s marginal cost:

cH

with probaility ,

cL

with probaility 1 ,

its private information.


Each firm maximizes its expected profit.
How to find the Bayesian Nash Equilibrium?
Firm 2 has two possible types; and dierent actions will be chosen for the two dierent
types.
{q2 (cL ), q2 (cH )}

Suppose firm 2 is type high. Then, given the quantity q1 chosen by player, its problem is
max(P cH )q2 = [a q1 q2 cH ] q2 .
q2

Hence,
q2 (cH ) =

a q1 cH
2

Similarly, suppose firm 2 is low type:


1

(*)

max [a q1 q2 cH ] q2 ,
q2

hence
a q1 cH
.
2
Important Remark: The same level of q1 in both cases. Why??
q2 (cL ) =

(**)

Firm 1s problem:
max [a q1 q2 (cH ) c] q1 + (1 ) [a q1 q2 (cL ) c] q1
q1

[a q2 (cH ) c] + (1 ) [a q2 (cL ) c]
2

Solve *, **, and *** for q1 , q2 (cL ), q2 (cH ).


q1 =

q2 (cH ) =

(***)

a 2cH + c (1 )(cH cL )
+
3
6

q2 (cL ) =
q1 =

a 2cL + c (cH cL )
+
3
6

a 2c + cH + (1 )cL
3

Auctions Two bidders for a unique good.


vi : valuation of bidder i.
Let us assume that vi s are drawn independently from a uniform distribution over [0, 1]. vi
is player is private information. The game takes the form of both bidders submitting a bid,
then the highest bidder wins and pays her bid.
Let bi be player is bid.
vi (b1 , b2 , v1 , v2 ) = vi bi if bi > bj
vi bi
2

if bi = bj

0 if bi < bj
1
max(vi bi )P rob{bi > bj (vj )|given beliefs of player i) + (vi bi )P rob{bi = bj (vj )|...)
bi
2
Let us first conjecture the form of the equilibrium: Conjecture:
equilibrium
2

Symmetric and linear

b = a + cv.
Then, 12 (vi bi )P rob{bi = bj (vj )|...) = 0. Hence,

max(vi bi )P rob{bi a + cvj } =


bi

(vi bi )P rob{vj

bi a
(bi a)
} = (vi bi )
c
c

FOC:

vi + a
if vi a
2
=a
if vi < a

bi =

(1)

The best response bi can be a linear strategy only if a = 0. Thus,


1
bi = vi .
2
Double Auction Simultaneously, Seller names Ps and Buyer names Pb . If Pb < Ps , then no
trade; if Pb Ps

trade at price p =

Pb +Ps
2 .

Valuations are private information:


Vb uniform over (0, 1)
Vs uniform over (0, 1) and independent from Vb
Strategies Pb (Vb ) and Ps (Vs ).
The buyers problem is

Pb + Ps (Vs )
: Pb Ps (Vs ) =
maxE Vb
Pb
2

Pb + E[Ps (Vs )|Pb Ps (Vs )]


max Vb
P rob{Pb Ps (Vs )}
Pb
2

where E[Ps (Vs )|Pb Ps (Vs )] is the expected seller bid conditional on Pb being greater than

Ps (Vs ).

Similarly, the sellers problem is


Ps + Pb (Vb )
Vs : Pb (Vb ) Ps ] =
Ps
2

Ps + E[Pb (Vb )|Pb (Vb ) Ps


max
Vs ] P rob{Pb (Vb ) Ps }
Ps
2
maxE

Equilibrium is where Ps (Vj ) is a best response to Pb (Vb ) while Pb (Vb ) is a best response to
Ps (Vs ).
There are many Bayesian Nash Equilibria. Here is one.
Ps = X

if

Pb = X

if

Vs X

Vb X.

An equilibrium with fixed price.


Why is this an equilibrium? Because given Ps = X if Vs X, the buyer does not want to

trade with Vb < X and with Vb > X, Pb = X is optimal.

Vb

Vb /Vs
Trade
Efficient

not to trade

0
Inefficient
lack of equilibrium

Now construct an equilibrium with linear strategies:


pb = ab + cb vb
ps = as + cs vs ,

VS

where ab , as , cb , and cs are to be determined. Note that pb ps (vs ) = as + cs vs i

Likewise, ps pb (vb ) = ab + cb vb i

vs

pb as
.
cs

vb

ps ab
.
cb

Then, the buyers problem is1

pb + ps (vs )
: pb ps (vs )
maxE vb
pb
2

Z pb as
cs
pb + ps (vs )
= max
vb
dvs
pb
2
0

Z pb as
cs
pb + as + cs vs
dvs
= max
vb
pb
2
0

Z pb as
cs
cs
pb as
pb + as

vb
= max
vs dvs
pb
cs
2
2 0

cs pb as 2
pb as
pb + as

vb
= max
pb
cs
2
4
cs

pb as
pb + as pb as

vb
= max
pb
cs
2
4

pb as
3pb + as
= max
.
vb
pb
cs
4
F.O.C.:
1
cs

3(pb as )
3pb + as

vb
=0
4
4cs

i.e.,
2
1
pb = vb + as .
3
3
Similarly, the sellers problem is
1

There is somewhat simpler way in to get the same outcome; see Gibbons.

(2)

Z 1
ps + ab + cb vb
ps + pb (vb )
vs : pb (vb ) ps = max p a
vs dvb
maxE
s
ps
ps
b
2
2
cb

Z
ps + ab
ps ab
cb 1
vs +
= max 1
vb dvb
ps
cb
2
2 ps ab
cb

ps ab
ps + ab
cb
ps ab 2
vs +
= max 1
1
ps
cb
2
4
cb

ps + ab
cb ps ab
ps ab
= max 1
vs + +
ps
cb
2
4
4

ps ab
3ps + ab
cb
= max 1
vs +
ps
cb
4
4

F.O.C.

1 3ps + ab
3
ps ab
1
vs +
+
1
=0
cb
4
4
4
cb

i.e.,

3
cb
3ps + ab
vs +
+ (cb (ps ab )) = 0,
4
4
4

i.e.,
ab
3ps
cb 3
ab + cb
= + vs + (cb + ab ) = vs +
2
4
4
4
2
i.e.,
2
ab + cb
.
ps = vs +
3
3
By (2), ab = as /3, and by (3), as =

ab
3

(3)

+ 29 . Hence, 9as = as + 2, thus as = 1/4. Therefore,

ab = 1/12. The equilibrium is


pb =
ps =

2
1
vb +
3
12
2
1
vs + .
3
4

(4)
(5)

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