Game Theory: Assignment 3

Total points: 40 Due Date: 20/11/2021

Contribution to grade: 10% (3xx); 7.5%(5xx) Due time: 11:59 PM

1. Consider the following game where nature plays first. The game goes left with proba-
bility p and right with probability (1 − p). Player one observes his type privately and
then acts. The figure explains the game below. Payoffs for player 1 are in black, and
player 2 are in blue. The game can be interpreted as a simultaneous move game.

(a) If p = 0.75, draw the Bayesian normal form of the game and find the BNE. (5)

(b) For every value of p, find all BNE. (10)

2. Two firms compete in quantities. They have symmetric marginal costs, c = 1, but they
have asymmetric information about market demand. Firm 2 does not know the state
of market demand, but thinkis it is p(Q) = 10−Q with probability 0.5 and p(Q) = 5−Q
with probability 0.5. Firm 1 has full information. Find the BNE (10)

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3. Two friends want to have a tennis match against each other. The question is whether
to play aggressively or defensively (which will depend on their ability). Both players
privately observe their ability, and this is explained by their probability of winning if
both play aggressively: pH or pL , which have corresponding probabilities q and 1 − q,
where 0 < pL < pH < 1. If a player plays attacking and the rival plays defensive, he wins
with probability γpj such that pj < γpj < 1, j ∈ {H, L}. If a player plays defensive and
his rival plays attacking, his probability of winning drops to δpj where 0 < δpj < pj .
If both play aggressive, probability of winning is pj for a j-type player. Finally, if
both players play defensive, there is no winner (payoff is 0, the match takes too long).
Reward from winning is R and loss from losing is L, such that R > 0 > L.

(a) Under which conditions there is a symmetric BNE where both players play ag-
gressive regardless of type. (5)

(b) Find the conditions to support a symmetric BNE in which both players play
aggressive only if their type is high. (10)