Problems On Games With Imperfect Information

Problems on games with Imperfect Information
1. Tragedy of the Commons
• Two herders decide how many sheep to graze on the village commons. The problem is
that the commons is small and can rapidly succumb to overgrazing.
• Let qi be the number of sheep that herder i = 1, 2 grazes on the commons, and suppose
that the per-sheep value of grazing on the commons (in terms of wool and sheep-milk
cheese) is
implying the value of grazing a given number of sheep is lower the more sheep are around
competing for grass.
• The herders’ payoff functions
• To find the Nash equilibrium, we solve herder 1’s value-maximization problem:
FOC:
Similarly,
Nash Equilibrium: q1 = q2 = 40. Each earns a payoff of 1,600.
1) Solve the problem using graphical method.
2) Suppose the per-sheep value of grazing increases for the first herder while the second
remains the same. How would that affect the best response functions?
2. Tragedy of the Commons as a Bayesian Game
Now suppose that herder 1 has private information regarding his value of grazing per
sheep
where herder 1’s type is t = 130 (the ‘‘high’’ type) with probability 2/3 and t = 100 (the
‘‘low’’ type) with probability 1/3. Herder 2’s value remains the same as before
• We first solve for the informed player’s (herder 1’s) best responses for each of his types.
For any type t and rival’s strategy q2, herder 1’s value maximization problem is
FOC:
• Rearranging and then substituting the values t = 130 and t = 100, we obtain
where q1H is the quantity for the ‘‘high’’ type of herder 1 (i.e., the t = 130 type) and q1L
for the ‘‘low’’ type (the t =100 type)
• Herder 2’s expected payoff is
Where
Rearranging the first-order condition w.r.t. q2 gives us
Or
Implying that q2* = 40. q1H* = 45 and q1L* = 30

3. Each player chooses one of two actions. All payoffs are known except for player 1’s
payoff when 1 chooses U and 2 chooses L.
Player 1’s payoff in outcome (U, L) is identified as his type t.
There are two possible values for player 1’s type, t = 6 and t = 0, each occurring with
equal probability. Player 1 knows his type before moving.
Player 2’s beliefs are that each type has probability 1/2.
a) Draw the extensive-form game for the normal-form game given above.
b) Solve for the Bayesian–Nash equilibrium of the game
• If player 1 is of type t = 0, then he would choose D rather than U because he earns 0 by
playing U and 2 by playing D regardless of what player 2 does.
• If player 1 is of type t = 6, then his best response is U to player 2’s playing L and D to her
playing R. This leaves only two possible candidates for an equilibrium in pure strategies:
• The first candidate cannot be an equilibrium because, given that player 1 plays (U|t = 6,
D|t = 0), player 2 earns an expected payoff of 1 from playing L. Player 2 would gain by
deviating to R, earning an expected payoff of 2.
The second candidate is a Bayesian–Nash equilibrium. Given that player 2 plays R,

player 1’s best response is to play D, providing a payoff of 2 rather than 0 regardless of
his type. Given that both types of player 1 play D, player 2’s best response is to play R,
providing a payoff of 4 rather than 0.
4. Information
Suppose, first, that both parties have the same 50-50 prior about the state. Then it is a
dominant strategy for player 2 to play L. And player 1 will consequently play B, so that
payoffs are (4, 4).
Now suppose that player 2 is informed (player 1 is uninformed, as before). Then player 2
will always play M or R depending on the realization of the state. Knowing this, player 1
will play T and payoffs are always (1, 3) regardless of state, a Pareto-deterioration.
5. Cournot duopoly with Imperfect Information
Consider a Cornout duopoly which operates in a market with the following inverse
demand function
where Q = q1 + q2 is the total output in the market. The cost of firm 2 is c2(q2) = 12q2 with
probability 1/4 and c2(q2) = 24q2 with probability 3/4. The cost of firm 1 is c1(q1) = 18q1.
Firm 2 knows its own cost, but firm 1 only knows the types of costs of firm 2 and its
probabilities.
1) Represent the above situation as a Bayesian Game. That is, describe the set of players,
their types, the set of strategies, their beliefs and their utilities
2) Compute the Bayesian Equilibrium and the profits of the firms in this equilibrium.
3) Suppose now that firm 1 knows that the costs of firm 2 is c2(q2) = 12q2. Compute the
Nash equilibrium and the benefits of the firms in this equilibrium.
1) The beliefs of the players are
The utilities of the players are the following
2) The Bayesian–Nash equilibrium is
The profits are
3) The Bayesian–Nash equilibrium is:
Profits are

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Problems on games with Imperfect Information

1. Tragedy of the Commons

• The herders’ payoff functions

• To find the Nash equilibrium, we solve herder 1’s value-maximization problem:

Nash Equilibrium: q1 = q2 = 40. Each earns a payoff of 1,600.

1) Solve the problem using graphical method.

Rearranging the first-order condition w.r.t. q2 gives us

Implying that q2* = 40. q1H* = 45 and q1L* = 30

The second candidate is a Bayesian–Nash equilibrium. Given that player 2 plays R,

1) The beliefs of the players are

The utilities of the players are the following

2) The Bayesian–Nash equilibrium is

The profits are

3) The Bayesian–Nash equilibrium is:

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