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Problem Set 3

The document describes 5 problems related to signaling games and auctions. Problem 1 defines a signaling game with 2 player types and asks to find the pure strategy perfect Bayesian equilibria. Problem 2 defines a signaling game between partners dissolving a partnership over ownership price and asks to derive a PBE. Problem 3 defines a signaling game between a plaintiff and defendant in a civil suit and asks to derive the PBE strategies and posterior beliefs. Problem 4 defines a signaling game between a chain store and potential entrants over multiple markets and asks questions about PBE strategies. Problem 5 defines a private value auction between 2 bidders with possible values and bids, and asks about the Bayes-Nash equilibria and expected revenue in second-price

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84 views2 pages

Problem Set 3

The document describes 5 problems related to signaling games and auctions. Problem 1 defines a signaling game with 2 player types and asks to find the pure strategy perfect Bayesian equilibria. Problem 2 defines a signaling game between partners dissolving a partnership over ownership price and asks to derive a PBE. Problem 3 defines a signaling game between a plaintiff and defendant in a civil suit and asks to derive the PBE strategies and posterior beliefs. Problem 4 defines a signaling game between a chain store and potential entrants over multiple markets and asks questions about PBE strategies. Problem 5 defines a private value auction between 2 bidders with possible values and bids, and asks about the Bayes-Nash equilibria and expected revenue in second-price

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rheya6
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© Attribution Non-Commercial (BY-NC)
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Problem Set 3 1. Consider the following signalling game, where player 1 is the signaller, and player 2 is the receiver.

Player 1 can be of 2 types t1 , t2 . Player 2s prior beliefs assign equal probabilities to the 2 types of player 1, who knows her own type. Player 1 can take one of 2 actions L, R. Player 2 observes the action chosen by 1, and then chooses one action out of the set {U, D}. The payos i are described below. (i) 1 (L, U, t1 ) = 1, 2 (L, U, t1 ) = 1. (ii) 1 (L, U, t2 ) = 0, 2 (L, U, t2 ) = 0. (iii) 1 (L, D, t1 ) = 2, 2 (L, D, t1 ) = 0. (iv) 1 (L, D, t2 ) = 0, 2 (L, D, t2 ) = 1. (v) 1 (R, U, t1 ) = 2, 2 (R, U, t1 ) = 2. (vi) 1 (R, D, t1 ) = 0, 2 (R, D, t1 ) = 0. (vii) 1 (R, U, t2 ) = 1, 2 (R, U, t2 ) = 0. (viii) 1 (R, D, t2 ) = 1, 2 (R, D, t2 ) = 1. Find all the pure strategy perfect Bayesian equilibria in this game. 2. Two partners must dissolve their partnership. Partner 1 currently owns share s of the partnership, while 2 owns (1 s). It is common knowledge that each partners valuation for owning the whole partnership is independently and uniformly distributed on [0, 1]. Each partner knows her own valuation. The partners agree to play the following game: partner 1 names a price p for the whole ownership, and then 2 chooses either to buy 1s share for ps or sell his share to 1 for (1 s)p. Derive a perfect Bayesian equilibrium of this game. 3. Consider the following signalling game. There are 2 players, a plainti and a defendant in a civil suit. The plainti knows whether or not he will win the the case if it goes to trial. The defendant knows that the plainti has this information, but only has prior beliefs that there is a probability 1 that the plainti will win. These 3 prior beliefs are also common knowledge. If the plainti wins, his payo is 3 and the defendants payo is 4. If the defendant wins, his payo is 0 and the plaintis payo is 1. The plainti has 2 possible actions; he can ask for a low settlement of 1 or a high settlement of 2. The defendants payo is then 1 and 2 respectively. If the defendant rejects this oer, then the case goes to court. Derive all the pure strategy perfect Bayesian equilibriumj strategy proles. In each case, also describe the posterior beliefs. 4. A chain store (the incumbent) is located in n separate markets, and it faces n potential entrants, one in each market. At date t(t = 1, . . . , n), entrant t who has 1

observed what happened in the t 1 preceding markets decides whether to enter (E) or stay out (O). If the potential entrant enters, the incumbent has to decide whether to ght (F ) or accommodate (A). The incumbent can be of two types - either Tough or Weak. The entrants do not know the type of the incumbent. But, their prior probability is that with probability p, the incumbent is Tough, and with probability 1 p, the incumbent is Weak. The following table describes payos to each entrant and the Weak incumbent in any market. (Here, the rst entry in each cell is the payo of the incumbent.) F A E (1, 1) (0, 1) O (3/4, 0) (3/4, 0)

The only change in payo for the Tough incumbent is that it gets a payo of 1/2 instead of -1, if it ghts entry of any entrant. The incumbents payo is the sum of the payos from each market. Suppose even the Weak incumbent may (depending on values of p and n) pretend to be the Tough incumbent in order to deter (future) entry. (i) Suppose rst that there is only one potential entrant, that is n = 1. What is the maximum value of p for which the entrant will decide to enter? (ii) Suppose n = 2. Show that accommodation in both markets is a best response to entrants that enter in both markets. (iii) Suppose n = 3. Derive the Perfect Bayesian equilibrium, and show that entrant 1 does not enter the market if p > 1/4. 5. Consider a private-value auction in which two bidders, i = 1, 2, participate. Suppose that bidders valuations (v 1 and v 2 ) are i.i.d. realizations of a random variable that takes values 1 and 3 with equal probability. Suppose that in the auction only three bids are possible: bi {1, 2, 3}. (i) In the case of a second-price auction, nd a symmetric Bayes-Nash equilibrium. What is the expected revenue of the seller in this case? (ii) In the case of a rst-price auction, show that both bidders following the strategy of bidding 1 when valuation is 1 and bidding 2 when valuation is 3 constitutes a Bayes-Nash equilibrium. What is the expected revenue of the seller in this equilibrium? (iii) Does the conclusion of the revenue equivalence theorem hold in this case? If it does not, can you provide an explanation?

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