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Here is the payoff matrix for the Entry Game with Cost
Uncertainty, with best responses marked with a star.
firm 2
− 14 − 14 3 ∗ 0∗
∗ 4
firm 1 0∗ 14 1 0
2
∗
− 14 14 1 0
4
∗
0∗ 34 0 0
player 2
0 0∗ 0∗ 0∗
player 1 1 − − 1 − 1 0∗
∗ − 0
1∗ 2 − 1∗ −1 0
player 2
0 0∗∗ 0∗∗ 0∗∗
player 1 1 − − 1 − 1 0∗∗
∗∗ − 0
1∗∗ 2 − 1 −1 0∗∗
X
= ()(() − |)
In the bigger game, there are three players, (1 ), (1 ),
and 2. Let us find the NE of this game by going over all
of the possibilities.
= 1 − 1 − 2
2 = 0 = 1 − − 2
1 2
2
1 − 1
2 (1) =
2
The payoff function of firm 2 is given by
2
2 = (1 − 1 − 2 )2 −
4
2 = 0 = 1 − − 2 − 1
1 2
2 4
3 1
2 (1) = −
8 2
The payoff function for firm 1 is based on the expectation
that half of the time it is competing with firm 2 and
half of the time it is competing with firm 2.
1 1
1 = [(1 − 1 − 2)1] + [(1 − 1 − 2 )1]
2 2
2 2
= (1 − 1 − − )1
2 2
1 1 3
− ( − 1 ) − ( − 1 ) = 1
2 8 8 32 8
9
+ 1 = 1
32 4
4 9 3
1 = ( ) =
3 32 8
Substituting 1 = 38 into the remaining two equations, we
have the Nash equilibrium strategy profile for this three
player game, 1 = 38 2 = 16
5 = 3
2 16
Thus, the BNE for the original game with two players is
the following:
3
1 =
8
5 3
(2 2 ) = ( )
16 16
() =
for some number that is the same for all players and is
between zero and one.
, or
Because of the uniform distibution, the probability that a
particular one of the other players has a valuation below
is .