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206 HW7 Extensive Signaling SolutionRatings: (0)|Views: 9|Likes: 0

Published by Chumba Museke

game theory

game theory

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https://www.scribd.com/doc/110863283/206-HW7-Extensive-Signaling-Solution

12/04/2012

text

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Problem set 7: Equilibria in extensive-form games1. (a)

By backward induction, in period 2:

1

q

∗

2

∈

arg max

q

2

≥

0

[

q

2

(1

−

q

1

−

q

2

)]

⇒

q

∗

2

(

q

1

) =

1

−

q

1

2

if

q

1

≤

10 otherwise

.

And thus in period 1:

q

∗

1

∈

arg max

q

1

≥

0

[

q

1

(1

−

q

1

−

q

∗

2

(

q

1

))]

⇒

q

∗

1

=12

⇒

q

∗

2

=14

.

This path yields

π

∗

1

=

18

and

π

∗

2

=

116

. We also need to check the other paths sincethe FOC for player 2 might yield negative payoﬀ on the other paths.

2

For each

q

1

(each player 2’s history), if ﬁrm 2 chooses the quantity derived by the FOC, itspayoﬀ is1

−

q

1

2

1

−

q

1

−

1

−

q

1

2

=(1

−

q

1

)

2

4

≥

0

.

Thus, both players have no incentive to deviate from the following strategy proﬁle:

q

∗

1

=12

,q

∗

2

(

q

1

) =

1

−

q

1

2

if

q

1

≤

10 otherwise

,

which is SPE.

(b)

We can write ﬁrm 2’s (discontinuous) proﬁt function:

3

π

2

(

q

1

,q

2

) =

q

2

(1

−

q

1

−

q

2

)

−

f

if

q

2

>

00 if

q

2

= 0

1

We assume

q

1

,q

2

≥

0. If there is no restriction, the question will be easier.

2

Of course, in this question, we do not need to worry about this by the form of the payoﬀ function, unlikepart (b).

3

Here, we assume that

q

2

= 0 means “staying out.”

1

Since FOC for

q

2

>

0 does not change, if ﬁrm 1 chooses

q

1

=

12

as before, ﬁrm 2chooses

q

2

=

14

and thus

π

2

=

116

−

f

. Firm 1 earns

π

=

18

.However, ﬁrm 1 may prefer to deter entry, that is, we need to check the otherpaths as in part (a). For each

q

1

(each player 2’s history), if ﬁrm 2 chooses thequantity derived by the FOC, its payoﬀ is

q

∗

2

(

q

1

)(1

−

q

1

−

q

∗

2

(

q

1

))

−

f

=(1

−

q

1

)

2

4

−

f.

If

(1

−

q

1

)

2

4

≤

f

, that is, 1

−

2

√

f

≤

q

1

≤

1 + 2

√

f

, ﬁrm 2 weakly prefers inaction.Note that, since 0

≤

(1

−

q

1

)

2

4

≤

f

, we can always ﬁnd such

q

1

in this case. Since

f <

116

, we have

12

<

1

−

2

√

f

≤

q

1

. When

q

2

= 0, ﬁrm 1’s payoﬀ is globallymaximized at

q

1

=

12

. This argument implies that if

(1

−

q

1

)

2

4

≤

f

, ﬁrm 1’s optimalaction is

q

1

= 1

−

2

√

f

≤

1, which yields

π

1

= (1

−

2

f

)

1

−

(1

−

2

f

)

= 2

f

(1

−

2

f

)

≥

18if 2

−√

28

≤

f

≤

2 +

√

28

.

If

f

is suﬃciently close to

116

, the above inequality is satisﬁed. Since 1+2

√

f

≥

1,SPE is as follows:

q

∗

1

=

1

−

2

√

f

if

2

−√

28

≤√

f

(

<

14

<

2+

√

28

)

12

if

2

−√

28

>

√

f,q

∗

2

(

q

1

) =

0 if

q

1

≥

1

−

2

√

f

1

−

q

1

2

if

q

1

<

1

−

2

√

f.

Intuitively, if the ﬁxed cost is high, the ﬁrm 1’s cost of deterring entry is low andso it is worthwhile for ﬁrm 1 to do so.

4

4

When ﬁrm 1 chooses 1

−

2

√

f

, it would hope that ﬁrm 2 chooses 0 but it is not strictly guaranteed since

1

−

q

1

2

is also optimal for ﬁrm 2 and this is a strictly worse choice for ﬁrm 1 if

f >

0. One might think aboutslightly larger quantity of ﬁrm 1 than 1

−

2

√

f

to guarantee the better choice, that is,

q

2

= 0, but, in thiscase, we can always ﬁnd a better action, which means this cannot constitute SPE.

2

2.

First, it is straightforward to check that the strategy pair deﬁned in the question isa subgame perfect equilibrium as in Proposition 122.1. Actually, we can show thisgame satisﬁes the one deviation property (Exercise 123.1 in MOAR). In the proof of Lemma 98.2 in MOAR, we suppose one proﬁtable deviant strategy

s

i

of player

i

inﬁnite subgame Γ(

h

) but we can apply this logic to this game since any inﬁnite subgamein this game yields the worst outcome. This implies that we can ignore any inﬁnitepath when you consider some proﬁtable deviation.Second, we show the uniqueness.

Step 1

.

M

1

(

G

1

) =

m

1

(

G

1

) = 1 and

M

2

(

G

2

) =

m

2

(

G

2

) =

c

1

.Let

M

i

(

G

i

) and

m

i

(

G

i

) be as in the proof of Proposition 122.1 in MOAR for

i

= 1

,

2.By the argument for (124.1) in MOAR with the roles of the players reversed we have

M

2

(

G

2

)

≤

1

−

m

1

(

G

1

)+

c

1

, or

m

1

(

G

1

)

≤

1

−

M

2

(

G

2

)+

c

1

. Now suppose that

M

2

(

G

2

)

≥

c

2

. Then by the argument for (123.2) in MOAR with the roles of the players reversedwe have

m

1

(

G

1

)

≥

1

−

M

2

(

G

2

)+

c

2

, a contradiction (since

c

1

< c

2

). Thus

M

2

(

G

2

)

< c

2

.But now the argument for (123.2) implies that

m

1

(

G

1

)

≥

1, so that

m

1

(

G

1

) = 1 andhence

M

1

(

G

1

) = 1. Since (124.1) implies that

M

2

(

G

2

)

≤

1

−

m

1

(

G

1

) +

c

1

we have

M

2

(

G

2

)

≤

c

1

; by (123.2) we have

m

2

(

G

2

)

≥

c

1

, so that

M

2

(

G

2

) =

m

2

(

G

2

) =

c

1

.The remainder of the argument follows as in the proof of Proposition 122.1 in MOAR:

Step 2

. In every SPE of

G

1

player 1’s initial proposal is 1, which player 2 immediatelyaccepts.

Step 3

. In every SPE of

G

1

player 2’s strategy accepts any proposal.

3.

Suppose that player 2 adheres to

tit-for-tat

. Consider player 1’s behavior in subgamesfollowing histories that end in each of the following outcomes.(

C,C

) If player 1 adheres to

tit-for-tat

the outcome is (

C,C

) in every period, so that3

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