Me1 Problem Set 5: Dynamic Games of Incomplete Information

Solutions to problems 4.1 a and b, and 4.3 a and b from Robert Gibbons
(1992) A primer in game theory, pp 245-247
4.1a We transform the game into normal form.
L’ R’
L 4,1 0,0
M 3,0 0,1
R 2,2 2,2
Nash-equilibria: ¦L; L
0
¦ and ¦R; R
0
¦ : There are no proper subgames;
so these equilibria are subgame perfect.
To …nd the Perfect Bayes Nash equilibria, consider sequential rationality
of player 2. As a function of his belief p, the payo¤ from choosing actions L’
is
p + (1 ÷p) 0 = p
and the payo¤ from choosing R’ is
p 0 + (1 ÷p) = 1 ÷p
Thus, for player 2, playing L’ is sequentially rational, given his belief if
p _
1
2
Playing R’ is sequentially rational given his belief for any
p _
1
2
Hence: the perfect Bayes Nash equilibria are ¦L; L
0
¦ and p = 1 (this informa-
tion set is reached on equilibrium path, so the belief is determined by Bayes
Rule and Player 1’s strategy) and ¦R; R
0
¦ and p _
1
2
(this is o¤ equilibrium
path, so there are no restrictions from Bayes Rule).
1
4.1b Transform the game into normal form.
L’ M’ R’
L 1,3 1,2 4,0
M 4,0 0,2 3,3
R 2,4 2,4 2,4
The pure strategy Nash-equilibrium is ¦R; M
0
¦ : There are again no
proper subgames, so this equilibrium is automatically also subgame
perfect. To compute the perfect Bayes Nash equilibria, consider again
sequential rationality of player 2. As a function of his belief p his
expected payo¤ from choosing L
0
is
p 3 + (1 ÷p) 0 = 3p
his expected payo¤ from choosing M
0
is
2 p + 2 (1 ÷p) = 2
and his expected payo¤ from choosing R
0
is
0 p + 3 (1 ÷p) = 3 (1 ÷p)
Choosing M
0
is optimal if 2 _ 3p = p _
2
3
and 2 _ 3 (1 ÷p) =
1
3
_ p:
Thus, Perfect Bayes Nash equilibria are ¦R; M
0
¦ and any p ¸

1
3
;
2
3

:
4.3a Suppose pooling on R is part of an equilibrium. What are the implica-
tions?
Let p denote Pr [ t = t
1
[ R] : Since this belief is on equilibrium path, we
must have p =
1
2
: Consider sequential rationality of player 2 given this belief.
The expected payo¤ from choosing u is
p 1 + (1 ÷p) 0 = p =
1
2
2
the expected payo¤ from choosing d is
p 0 + 2 (1 ÷p) = 2 (1 ÷p) = 1
So, player 2 will play d:
The implied payo¤s for types t
1
and t
2
are as follows:
t
1
gets 3 and t
2
gets 2.
What would happen if player 2 would observe L being played? It is
important to know this, since beliefs at this information set will be part of
the equilibrium. Let q denote Pr [ t = t
1
[ L] : The expected payo¤s of player
2, after a choice of L by player 1, as a function of q are as follows.
Expected payo¤ from playing u
2 q + (1 ÷q) 0 = 2q
Expected payo¤ from playing d
0 q + (1 ÷q) 1 = 1 ÷q
Player 2 strictly prefers to play u if and only if 2q > 1 ÷ q = q >
1
3
and
prefers to play d if q <
1
3
: (he is indi¤erent for q =
1
3
).
If player 2 has a belief q >
1
3
; then he would play u if player 1 were to play
L; so the payo¤s of type t
1
and t
2
from deviating to L would be as follows:
t
1
would get 1 and
t
2
would get 0.
Given this belief, no type has an incentive to deviate; so this is consistent.
If the belief were q <
1
3
; then type t
2
could obtain a payo¤ of 3 from
deviating; since this is better than the payo¤ 2 in the proposed pooling
equilibrium on R; he would have an incentive to deviate.
Conclusion: equilibria that involve pooling on R are ¦R; R; d (if R); u (if L)¦
and any belief q >
1
3
:
4.3b Pooling equilibrium where all sender types play L: Let q = Pr [ t = t
1
[ L]
and r = Pr [ t = t
2
[ L] : Since this is on equilibrium path, we have q =
r =
1
3
:
3
Player two will always play u following L since his payo¤ from d is zero
all the time.
The payo¤s of the sender types are as follows:
t
1
gets 1
t
2
gets 2
t
3
gets 1
What beliefs o¤ equilibrium path make this part of an equilibrium?
Let p = Pr [ t = t
1
[ R] and s = Pr [ t = t
2
[ R] :
Player 2’s payo¤s as a function of his beliefs for actions u and d are as
follows:
action u:
p 1 + s 1 = p + s
action d :
(1 ÷p ÷s) 1 = 1 ÷p ÷s
So it is easy to see that player 2 strictly prefers to play u if p + s >
1
2
: He
would strictly prefer to play d if p + s <
1
2
:
The payo¤s of the sender types from choosing R would be
for p + s >
1
2
t
1
would get 0
t
2
would get 1
t
3
would get 0
for p + s <
1
2
t
1
would get 0
t
2
would get 1
t
3
would get 2
Thus: perfect Bayesian equilibria that involve pooling on L : ¦L; L; L; u(if L) ; u(if R)¦
and any p + s >
1
2
:
4