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Problem Set 3

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9 views3 pages

Problem Set 3

Uploaded by

Nacho Almudevar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Microeconomics: Decision Theory, MQuEA Prof.

Arguedas

Problem set #3
_____________________________________________________________________________

1. In the following incomplete information game, player 1 knows whether nature has drawn
Game A or Game B, but player 2 does not. The corresponding payoffs for the two players are
given in the following two matrices:

Game A L R
U 1, 1 0, 0
D 0, 0 0, 0

Game B L R
U 0, 0 0, 0
D 0, 0 2, 2

Compute:

(i) The pure‐strategy Bayesian‐Nash equilibria of the simultaneous version of this


game.
(ii) The Perfect Bayesian equilibrium of the sequential version of this game (assume
the informed player plays in the first place). Clearly outline the equilibrium beliefs
that sustain the equilibrium.
(iii) Explain the differences between the two types of equilibria found.

2. Consider the following two normal‐form representations of a simultaneous game:

Game 1
D E
A 7, 6 2, 0
B 5, 8 1, 1
C 0, 0 4, 4
Game 2 D E
A 7, 6 0, 0
B 10, 8 1, 1
C 0, 5 3, 4
Microeconomics: Decision Theory, MQuEA Prof. Arguedas

Problem set #3
_____________________________________________________________________________

a) Assume player 1 knows whether the payoff matrix is that of game 1 or game 2, while
player 2 does not. Find all the pure Bayesian‐Nash equilibria of the incomplete
information game.
b) Assume instead that players play sequentially. The informed player (player 1) moves
first. Then player 2 observes the action chosen by player 1 and moves afterwards.
Find the perfect Bayesian equilibrium of this game. Is the equilibrium pooling or
separating?

3. Consider the three following normal‐form games, such that player 1 plays in rows and player
2 plays in columns:

GAME A
F G
F 1,1 4,0
G 0,4 3,3

GAME B
F G
F 3,1 0,0
G 0,0 1,3

GAME C
F G
F 1,0 0,1
G 0,1 1,0

(i) Assume that player 1 knows the payoff matrix of the game players are playing, but player 2
does not. In fact, player 2 only knows that he could be in game A or B or C with equal probability.
Assume also that player 1 plays first and player 2 can at least observe if player 1 has chosen
strategy F or G. Find the perfect Bayesian equilibrium of this game. Carefully explain the way in
which you find the equilibrium, and outline the equilibrium beliefs that sustain the equilibrium.
(ii) Assume that player 2 cannot observe player 1’s choice. Find the Bayesian Nash equilibrium
of this game. Carefully explain the way in which you find the equilibrium.

4. Two firms compete in quantities in a market of a product whose (inverse) aggregate demand
function is 𝑃 100 𝑄. Firm B knows that firm A operates with a marginal cost of 10. On the
Microeconomics: Decision Theory, MQuEA Prof. Arguedas

Problem set #3
_____________________________________________________________________________

other hand, firm A knows that the marginal cost of B is 10 on average, but firm B could be
operating with a high marginal cost of 16, or a low marginal cost of 4. Assume fixed costs are
zero for both firms. Compute the Bayesian Nash equilibrium of this Cournot game of incomplete
information.

5. (This one resembles a poker game) The unique firm supplying a product in a market (firm A)
is threaten by the possible entrance of a competitor (firm B). If firm A operates with high costs,
its (monopolistic) profits are 4, but it firm B enters the market and competes against A, profits
for A and B are respectively 1 and 3. If instead firm A operates with low costs, its (monopolistic)
profits are 6, but it firm B enters the market and competes against A, profits for A and B are
respectively 3 and ‐1. Assume that B does not know whether firm A operates with high or low
costs. A way of signalling the cost structure to firm B is by setting a high or a low price. If A sets
a high price when costs are high and a low price when costs are low, profits for the two firms
are as expressed above. However, A can falsely set a low price when operating with high costs
to try to deter entry. In this case, firm A’s profits are 3 if it remains alone in the market, while all
this profit is captured by firm B under entry. Calculate the Perfect Bayesian equilibrium of this
game. Show that the equilibrium type (separating or pooling) crucially depends on the subjective
beliefs of firm B about the type of firm A.

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