5.

Bayesian Games

Summary
Benjamin Bernard
Bayesian Nash Equilibrium
Bayesian Nash Equilibrium Continuum of Types

Dependent Payoff Types

ϑH1 ω1 ϑL2 ω2 ϑL1 ω3 ϑH

2

Dependent payoff types:

• Bidders’ valuations in an art auction are typically correlated.
• Costs of competing firms may be correlated.

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Bayesian Nash Equilibrium Continuum of Types

Bayesian Nash Equilibrium

Definition 3.3

A Bayesian Nash equilibrium (BNE) is a strategy profile σ = (σ1 , . . . , σn )

such that for every player i, every type τi , and every action ai ∈ Ai (τi ),

Eτi ,σ [ui (θ, A)] ≥ Eτi ,(ai ,σ−i ) [ui (θ, A)].

Interpretation:
• No type has an incentive to deviate, given correct conjecture δσ−i .
• With finitely many types, we find BNE like Nash equilibria: compute
expected utility and find mutual best responses.
• Because A and θ are correlated through T , we write
Eτi ,σ [ui (θ, A)] = Eσ [ui (θ, A) | τi ] = Eσ [ui (θ, σ(T )) | τi ].
• We condition on θ and T−i to compute Eτi ,σ [ui (θ, A)].
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Bayesian Nash Equilibrium Continuum of Types

Outcome and Expected Utilities

Outcome:
• The realized action profile A = (A1 , . . . , An ) satisfies for each player i:
• Conditional on Ti = τi , Ai is independent from θ, Tj , and Aj for j ̸= i.
• Conditional on Ti = τi , the distribution of Ai is σi (τi ) ∈ ∆(Ai ).
• This means that, once we condition on θ and T−i , given τi , we compute
the expected utility as in a complete information game.

Induced probability measure:

• Player i of type τi ’s subjective distribution over (θ, A) is
X
Pτi ,σ (θ = ϑ, A = a) := Pτi ,σ (A = a | θ = ϑ,T = τ )Pτi (θ = ϑ,T = τ )
τ−i ∈T−i
n
!
X Y
= σi (τi ; ai ) Pτi (θ = ϑ, T = τ ).
τ−i ∈T−i i=1
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Bayesian Nash Equilibrium Continuum of Types

Jury Voting

Jury Voting:
• Parametrization σi (τiG ) = xG C + (1 − xG )A, σi (τiI ) = xI C + (1 − xI )A.
• To find expected utility, we condition on possible values of θ and T−i
because θ is payoff-relevant and T−i determines distribution of A−i :
G G 
ϑG P ϑG  τiG
   


EτiG ,σ [ui (θ, A)] = EτiG ,σ ui (θ, A)  ϑG , τ−i P τ−i

I I 
ϑG P ϑG  τiG
   


= EτiG ,σ ui (θ, A)  ϑG , τ−i P τ−i

G G 
ϑI P ϑI  τiG
   


= EτiG ,σ ui (θ, A)  ϑI , τ−i P τ−i

I I 
ϑI P ϑI  τiG
   


= EτiG ,σ ui (θ, A)  ϑI , τ−i P τ−i

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Bayesian Nash Equilibrium Continuum of Types

Avalon: a Social Deduction Game

1 1 1



6
, 1, 1 ωGE E ωGGE , ,1
3 3

1
, 1, 13 1, 16 , 1



3
ωGE G ωGGG ωE GE
1 1 1


, ,
6 6 6

1
1, 13 , 1



1, 1, 6
ωE E G ωE GG 3

5-player game:
• There are three (G)ood characters and two (E)vil characters.
• Alignment (Good or Evil) is assigned randomly in the beginning. The
distribution of this random assignment is the common prior P.
• For a subset of players {1, 2, 3}, the belief space and the induced family
of posterior beliefs is depicted above.
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Bayesian Nash Equilibrium Continuum of Types

Avalon: Double Fails

0 Fails 1 Fail 2 Fails

Good 1 −1 5

Evil −1 1 −5

2 Players go on a quest:
• Every evil player on the quest can choose to (S)ucceed of (F)ail.
• Good characters cannot fail a quest, hence they must choose (S)ucceed.
• A double fail is particularly damning to the evil players because it
unambiguously reveals that two members of the quest are evil.
• What is the Bayesian Nash equilibrium of this game?
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Bayesian Nash Equilibrium Continuum of Types

Avalon: Double Fails

S F S
S
F 1, −1 F −5, −5 1, 1
S 1, 1
S −1, 1 S 1, 1 −1, −1
2 good players
1 evil, 1 good player 2 evil players

Each player has 4 types:

• τiG : player i is good.
• τiE : player i is the only evil player on the quest.
• τij : player i is evil and on the quest with evil player j ̸= i.

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Bayesian Nash Equilibrium Continuum of Types

Selling Farmland

A Rice Farmer considers selling

his/her land to a Tea Farmer.

Annual average yield:

• Tea: 5.35m NTD/km2 .
• Rice: 4.2m NTD/km2 .

Equilibrium trades:
• Trade at any price p ∈ [4.2, 5.4] can be supported in equilibrium by

P(L) ∩ [4.2, 5.4] ̸= ∅, p = min P(L).

• No trade is also an equilibrium outcome, supported by strategies

P(L) ∩ [4.2, 5.4] = ∅, p < 4.2.

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Bayesian Nash Equilibrium Continuum of Types

Continuum of Actions

$80
$60
$40
$20

09/21/2019 09/21/2021

Cournot competition:
• Firms i = 1, 2 produce quantity qi ≥ 0 at unit cost c = 10.
• There is uncertainty about the demand, i.e., p(ϑ, q) = ϑ − q 1 − q 2 .
• Firm 1 knows θ ∈ {70, 90}, but Firm 2 believes they are equally likely.
• What is the Bayesian Nash equilibrium of this game?

Source: https://www.macrotrends.net/2516/wti- crude- oil- prices- 10- year- daily- chart 9

Bayesian Nash Equilibrium Continuum of Types

Cournot with Demand Uncertainty

• Parametrize σ1 (ϑL ) = qL∗ , σ1 (ϑH ) = qH∗ , and σ2 = q2∗ .

• Firm 1 of type ϑ maximizes u 1 (ϑ, q) = (ϑ − q 1 − q 2 − c)q 1 .
• Firm 2 does not know θ and maximizes its expected utility

Eµ,σ [u 2 (ϑ, q)] =

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Continuum of Types
Bayesian Nash Equilibrium Continuum of Types

Number of Types and Actions

Number of types
1 2 continuum
Number of actions
cutoff
2
strategies
Works like finding
Nash equilibria
monotonic
cont.
strategies

Continuum of types:
• In many applications, types are meaningfully ordered: a higher type
values a certain good more, has lower production costs, etc.
• With two actions, this often leads to equilibria in cutoff strategies.
• With a continuum of actions, we often restrict attention to equilibria
that are monotonic in the type because they are intuitive.
• Monotonicity often implies differentiability in equilibrium.
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Bayesian Nash Equilibrium Continuum of Types

Swapping Houses

Swapping houses:
• Two players i = 1, 2 own a house, whose values vi are drawn indepen-
dently from a uniform distribution on [0, 1].
• Because the grass is always greener on the other side, each player i
values player j’s house at 32 vj .

In an exam or assignment/exam:
(a) [2 points] Show that in any Bayesian Nash equilibrium with positive
probability of trade, players must use cutoff strategies.
(b) [7 points] Find all BNE in cutoff strategies.

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Bayesian Nash Equilibrium Continuum of Types

War of Attrition

Relationship squabbles:
• Cameron and Drew have a fight and each player i = C , D chooses
ti ≥ 0, how long to give the other the silent treatment.
• Each player i = C , D gains utility θi ∼ Exp(λ) from “winning” the
argument, but there is a disutility to the length of the argument:
(
−ti if ti ≤ t−i ,
ui (ϑi , t) =
ϑi − t−i if ti > t−i .

• Find the unique, symmetric, increasing, and differentiable pure-strategy

Bayesian Nash equilibrium s.

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