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    65 views26 pages

    Fudenberg and Tirole - Game Theory (Solutions Manual New)

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    Jason Bridges

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    © All Rights Reserved
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    of 26
    Lee) + L(eta) = 4 and use e7" as the discoune factor The same reasoning as before gives prio Fqy) - pla + v(l-g) + Tay) +a - 0. To show that the probability of dropping out between time 0 and tine T is 5 independent of q it will suffice to show that the limit as 4 7 0 of p/a exists and is independent of q. (Checking this requires some work. I'11 : omit the details.) The ratio p/A satisfies (pey2(ae"Fqv) + (p/ar(v(l-g) + eTMqv + a) #1 = 0. This gives tim psa =}. 90 the probability that a player does not stop before tie t is a - aay which converges to exp(-t/v) as 69°0. Note that this is independent of q (and of course equal to the result derived in section 4.5.2 for the case of q- 0). Exercise 4.2 We start with a couple of simple observations. First, after your opponent has built a plant, it is dominated for you to build. Second, building @ plane at any ¢ € (4,5,6,7,8,9,10) is dominated by not building. die now look ac what muse happen if boch players have done feasibility studies before © = 3. If at t= 7 no one has built yet, st Ss dominated for player 1 not to build act = 7 . If player 1 is playing an undominated strategy and ac t ~ 6 no one has built then firm 2 gets payoffs 13 - ¢(1-6°75) if it builds, and -« if it 38 doesn’t, as player 1 will build at t = 7 and player 2 will nev Hence at ¢ = 6, player 2 must build if no one has so far. Given chat 2 plays an undominated strategy, it nov follows =: build ac c= 5 . The next iteration shows that player 2 must build at c = At t= 3, player 1 cannot build as his profits vould be regex . Next, we look at what happens if only 1 player has done a =: If only player 1 has studied before t = 7 chen his only == strategy is to build at t= 7. . I£ only player 1 has studied before t = 6 and pls: undominaced strategy then player 2 cannot study at ¢ = 4 Repeating this process we eventually find chat ‘£ studied before t - 3 then the unique outcome surviving dominance is for player 2 never to study and for player 2 A similar argument shows that if only player 2 has the only surviving outcome is for player 1 never to szutv to build at c= 6. We now show that when both players play the unde=iraze¢ above, it is dominated for player 2 not to study at z= 2 ~ If player 1 studied at t ~ 1, the results above 2 builds at t= 4 if he studies att -2 ~ L builds ac t= 7 if player 2 doesn’e stu Tf player 1 didn’t study at t = 1, the results @ 2 builds acc = 6 39 ~ 1 studies at ¢ = 3 and builds act - 7 othervise. tm either case, player 2 ts better off studying at © ~ 2. above when players play undominated Again using the outcomes derived strategies we see that the outcome is 2 builds at & if player 1 studies ac t= 1 2 builds at 6 if player 1 doesn’t study at t ~ player 1's payoffs are’ thus -¢ and 0 respectively. Hence PLsyer 1 does not study at t+ 1 which leaves player 2 studying at ¢ ~ 2 and building at t - 6 as the undominated outcome. Player 2 1s able to postpone building because che delay between che scudy and building allovs him to respond and build firse 4f player 1 ever tries to study. This makes it not worthehile for player 1 te study allowing player 2 to wait. ; Player 1 cannot preempt because he will be unvilling to build ac t= 3. Player 2 thus has the first profitable opportunicy co build, and vill always carry it out if player 1 tries to take preemptive action 5 who has qhis is Like «preemption in that whae turns our to macter 1 che first opportunity to carry out the project. This advancege °S enough to force player 1 to drop out of the race Exercise 4.3 Ye follow an arguéent analogous to the iterated conditional deninance argument of section 4.6 Suppose that after k rounds we know 1. Player 2 never offers x > x esueteng eno onatel 2. Player 2 rejects any x > 1 - 50x") 3. Player 1 never offers x < y* 4, Player 1 rejeces any x < 5,y* Then, if player 1 rejects an offer his payoff is at most k, k 5) (1 + 8yC-x)) = 6,(1-55) + 6165x! Therefore, player 1 must accept any offer above this level, so player 2 vill not offer kel k x > x"! = [6 (1-85) + 6,6" + 0.01] The brackets | J indicate that the quantity is rounded downward to the nearest 0.01. x**1 is the smallest offer which player 2 is sure will be accepted and dominates any higher offer ‘As player 2 knows an offer of x"! aust be accepted, he rejects any +1 offer which gives a worse payoff than waiting one period and offering x" i.e 2 rejects any x >1- 6,(1 - xh") Starcing from x° = 1, repeating this process for § - 1/2 gives xa | 254.254 01] = 51 A similar argument shows kal yee [i= 60-899 - .01] and for § ~ 1/2 we find We now know Player 1 never offers x < -66 Player 1 rejects x < 33 Player 2 never offers x > 34 Player 2 rejects x > -67 this leaves us with tvo perfect equilibria 1, Player 1 offers x - -66. Player 2 accepts: c 2 would reject .67 and player 1 vould acer (ofe the pach playe 233). 2. Player 1 offers x .67. Player 2 acceprs- (oft che pach player 1 vould'reject an offer of 39) \ voce: ‘There ave also atzed equilibria ax in che second case pleyey 2 '¢ \ indifferent beeween accepting and rejecting the offer. We could have player 2 | 67 with probability 1/67. Then player 1 is also always accept .66 but reject ¢ indifference becveen, his offers and he can mix as vell- yor the case of § very close to 1, the iterated conditional dominance process rules out no strategies. Lf 6, > .99, then xt e | 6 01-6)) + se + or] = Similarly we find that y" = 0 if 6) > .99- Repeating this we'd find x® =. and y= 0 for all k. This is not a veakness of the method. Rather, for § sufficiently large. | i === The strategies are: Player 1 offers x in each period 748 Player 1 rejects any offer x in every period (and accepts all offers ) IE the players observe a random variable y,, a SPE is formed by having the players play a subgame-perfect equilibrium of the original game (which is identical to the continuation game) after each possible observation a tah se ege ue can use a different SPE after each y,, so ve can obtain any payoff which is a convex combination of the payoffs in (a). This 1s precisely the set given in che answer to part (a) (c) If players observe y, at the start of the second period, the second period payoff can be any point in the convex hull of (6,4), (4,6) and (3.75,3.75) After each realization of y,, one of the subgane-perfect equilibria of the continuation game must be played. They are (0,0) then any 2™4 period equilibriua (2,2) then any 2™ period equilibrium with payoff = 4.75 for each player @,-1) then any 2" period equilibrium with payoff > 4.75 for player 2. (-1,3) chen any 2™ period equilibrium with payoff = 4.75 for player }. Note that this gives new payoffs like (7,7) which were not in the sets (a) and (b), because che randomization y, allows us to specify an equilibriun with payoff (5,5) if (UL,LL) is played in period 1. This allows us to punish either player sufficiently strongly to prevent a deviation. (4) tn pare (B) using one public randomization at the scart simply convexifies the set of perfect equilibrium payoffs. The use of randosizations between periods enlarges the set of perfect equilibria for § fixed and T finice. The claim chat they are unnecessary in the proof of the folk theorem is that when T is infinite and § > 1 we can Simulate mixtures by cyeling through pure strategy profiles, so in the limit the randomizations are unimportant Exercise 5.7 zach player has sixteen possible Markovian strategies, consisting of a choice from (C,D) after each of the possible histories (C,C), (D,D), (D.C) or (DD). Assume that all players use the same pure strategy and that both populations have the same stationary distribution of play Suppose that in the steady state a fraction p of players has played ¢ in the previous period. We denote strategies by a quadruple (4¢¢.2¢p-2p¢-pp) where acy ~ 1 if player i plays ¢ after (C.D). In order fo have 2 steady state it must be the case that 5 2, P= Peace + POL-P)agy + CL-PIPEDE + CLP) "App Thus except for a few extraordinary values of p (e.g. p € (0,1,1/2 must be that ace 7 bs Gpp = 0 ahd exactly one of a¢y.an¢ - 1 ‘cc DD ee ye oe : With this strategy player i's action does not depend on his opponent's past Look at a, app > play. Thus, player j knows he will have no effect on future play and will alvays play D, Thus, the strategy above is not a Markovian equilibriua = 0, ae eh apy 7 0 7 ‘De DD Next, consider age ap This is the cit-for-tat strategy. Player i's expected continuation payoff depends on the action he played last period. Let c represent the continuation payoff after playing C, and d after D If player i follows the strategy and played C in the previous period his payoff is c= p(l + Se) + (1 - p)(2 + 54) (where the 2 terms come from when his random opponent played C and D the period before). If player i played D in the previous period, player } plays D vhile player i plays ¢ or D according to the strategy so d= p(-l + be) + CL - p)(O + Sa). Subtracting the second equation from the first we get e-d-2. Now suppose the history is (D,C). I£ player 1 plays D instead of C he gains 1 in the current period but loses 26 in continuation payoff, so he follows the strategy only if 6 < 1/2. If the history is (c,D) the 1°© period loss from playing C instead of D is 1 and the future gain is 26 so we must have 6 > 1/2. This strategy is then only a Markovian equilibrium for 6 ~ 1/2. We can also have steady states with p~ 0 or p= 1. If p= 0, ap) ~ 0 is necessary to maintain the steady state. We can construct chree Markov equilibri this way: 1) All players play D inevery period, 1.e. age = App ~ Ap ~ Apc ~ ° This is che standard equilibrium and works for all 6. 2)+3) For 6 = 1/2 we get two equilibria where agp = ap, ~ 1 and app € (0.1). 6 = 1/2 is needed so that players do not choose to deviate to get a higher continuation payoff, but are willing to play C after (D.C) or (C,D) to get the continuation payoff For p= 1 we find two more equilibria which are again valid only for 51/2. LV) agg = 896“ App - I co) @) ecc a cp 7 *oc 7 Sop ~ ° Exercise 5.8 (a) Leto be a Nash equilibrium of the repeated game. Define 2 nev strategy o° by Phase 1 ‘All players play according to 7 as long as the history n® has positive probability under . If two or more players deviace simultaneously play any subgane-perfeet equilibriua of the continuarton gene: Phase 21 Ie player i was the first player to unilaterally deviate, all players _ for the rest of play the subgane-perfect equilibrium which gives player iy the game. Jo see that this is a perfect equilibrium noce chac at sy subgame in Phase ai ve are in a subgane-perfect equilibrium so no one vance £0 deviate. Now, suppose player J can profitably deviate from the scratesy 0% bY playing 3 at some history bY in Phase 1, (We can assune thac 3% differs profitable deviation 7. from of, only in period ¢.) We construct a €rom the Nash equilibrium 0, by having player } play according to 0, a5 long as nf has not been reached, according to , at hv and playing @ Dest response to o_, at all subsequent histories. We have © (25.2.51h) a (2,.0,,) 7 9.4) + Prob(h™ |e) (4, (2% yyy) 7 8% 2-) Prob(h*] 2} (4 (2% > ute, 4 63 ‘The second inequality: follow: ) 7 g because in period t the gain from deviating +s enactly che sane ax vas che gain from playing 2 instead of oj, end the loss sm coueimuacion payoff fron period cel on is sualler (because the continuation payoff {5 us into) An bo caste wish no devacion ond © se, sep © PRY 7 35. since we defined 4 to be a best response at all subsequent histories). : — ay Gye Ihe This contradicts that o was a Nash equilibrium and hence establishes thar @ is a subgane-perfece equilibriun. (b) Let ¢ be a Nash equilibrium of the repeated game. We form a perfect equilibrium as follows: Phase 1. Players play according too as long as no player i has played a strategy which has zero probability under ¢. If player i deviates go to phase 21, hase 24 All players play m* in each period. If some player, say j, deviates in this phase play moves to phase 2). At any history in Phase 1, the same argument as in part (a) shows that no deviation is profitable. At any history hé in Phase 21, player 1 is already playing a one-period best response in period t, and his deviation will not affect fucure play. Player j has continuation payoff g,(a') if he follovs the equilibriua stracegy ands (1-8)¥, + éyy if he deviates for one period and then is minnaxed. If payoffs are bounded above by (G, - yy) ) If player 1 can commit to a mixed strategy, he vould choose a. 1 £0 be the strategy of playing each of U and D with probability 1/2. This gives him a payoff of 4 (if player 2 plays L vhen he is indifferent; otherwise, player 1 can get payoffs arbitrarily close to 4 by playing U with probabilicy l z7 8. (©) We proceed as outlined in the hinc. (1) Let v"(5) be the supremun of player 1's per period payoff in any Nash equilibrium. Suppose v"(6) > 2. Let = (18) (5)-2)/2 Choose an equilibrium ¢ where player 1's equilibrium payoff v(é) = v"(5)-«. Note chat v"(5)-¢ > 2 as well. Suppose that under ¢, player 1's first period payoff is not greater than 2. The continuation payoff from period 2 on nust be a Nash equilibrium payoff soir is less than or equal to v"(65). Hence v(5) = (1-6)+2 + 6v"(5) 2 VG) = v6) 2B) = 8)? = 2 a contradiction, Cece ( ( (2) If player 2 does not play L with positive probability in period 1, ried which is player 1 will have an expected payoff = 1 in che first Pe impossible by (1) Te player 1 does not play D vith positive probabilicy then player 2 will play B with probability 1 which is impossible given the previous conclusion (3) As player 1 plays D with positive probability in period 1, his all expected expected payoff when he plays D must be identical Fo his ove payoff in equilibriun. The greatest possible payoff when he plays D is (1-6)+2 + VCS) as he gets at most 2 in period 1 and at most v5) in the subgame following a play of D. Hence Whe) = es 65) = (1-8) + HD (1-8) (0 (6)-2) 8 emcee ‘ which clearly contradicts the assumption that w(s) > 2. Euercise 5.10 (a) Tf both players 1 and 2 randomize 50-50 between U and P, there is @ yt chance that both play U and a 1/4 chance that both play Player 3 will then receive a payoff of -1/4 when he plays L or R. annot be held to a payoff below -1/4 for any plays U wich probability To show that player 3 c: strategies of players 1 and 2, suppose that player 1 p and player 2 plays U with probability q. Tf p = 1/? and q = 1/2, then player 3's payoff to L is -(1-p)(1-q) = -1/4. I p < 1/2 and q < 1/2 then Player 3 can get a payoff of at least -i/4 by playing R. Finally, for all other cases we may assume p = 1/2, q < 1/2 with p> (1-q). (All other cases are identical renumbering the players and/or the actions.) Now the payoff to L is -(1-p)(1-q). (1-p)(1-q) s q(1-q) 5 1/4. Again player 3 can get a payoff of at least -1/4. (b) In any period t for which y™! © (0,2), each of players 1 and 2 randomize 50-50 becveen U and D so, as described in part (a), player 3 gets a payoff of -1/4. In any period ¢ for which y*"! = 1, define player 1's and player 2's strategies as follows, If player 2 played H in period t-1 then both 1 and 2 play D in period c. If player 2 played T in period t-1 chen both 1 and 2 play U in period t, We may do this because when y°"! = 1, player 1 and 2 both know their ou previous play, so player 2's choice of (H.T) is common knowledge for them. Given these strategies and only player 3's information at time ¢, ve see chat both play U with probability 1/2 and both play D with Probability 1/2. Thus, player 3 has an expected payoff of at most -1/2 in period t. In the repeated game, player 3 has an expected payoff of -1/4 in the first period, and -3/8 in all subsequent periods. (y""} ~ 1 occurs with probability 1/2.) For any § > 0 this gives a repeated game payoff below the mingax level of -1/4, Note thae if we alloved players 1 and 2 to play correlated strategies (see Chapter 2), player 3's minmax level would be -1/2, because players 1 and 2 could play (U,U) wich probability 1/2 ané (p,D) with probability 1/2. were, players 1 and 2 have as private information the outcome of their period tel (4,7) randomizations whenever ve how how re 1. The strategies given sl this randomization can be used a5 4 correlating device when it is privare information. oreaes Chapter im Exercise 6.1 (a) We look for an equilibrium where each player contributes if his cost is less than or equal to c™. For player i ‘to prefer contributing iff c, < c™ the player with cost e* must be exactly indifferent. We must have c* = Prob(No other player contributes) = 2 ece*y) ht Comparing the values of the left and right sides at # and 1, ve see that there is at least one solution in (8,1). Such ac™ is a Bayesian equilibriua. (b) Suppose K = 2, and suppose that all players other chan player i Play the strategy of never contributing. Regardless of player i's action, the project will not be completed. Thus, player i‘s payoffs are 0 and -c. to pet contributing and contributing. Not contributing is a best response. We can also find a symmetric Bayesian equilibrium vhere player i contributes if and only if c, 1? = Firm i must enter if Let p = PCa) 2° = 0°) : step kel: Suppose we know from round k that firm i enters with probability , pe te, ‘]. Then, firm i must not enter if kate +a- aka 6) <0 26> mm am. nk a ght Firm i must enter if. Pat - ay +a, Ba - ey >0 oe, cm a. type w ght keel peel We define in this vay ***, 9") such that firm i must enter if @, < 6*** and muse stay out if 9, > FMT i Ieeracing ve find values ¢° and 7° In the case of ex-ante dominance we can also conclude that the firms aust use s cutoff rule of entering 1f #, 5 6 for some 6 © (07.77) Depending on P, che iterated dominance process may give §” = J” so the two concepts of dominance coincide and the equilibrium is unique. (4) See Fudenberg-Tirole [1986]. Exercise 6.3 Ve show that it is a Bayesian equilibrium for player 1 of type #; to bid 3, (8) = 4/2 To see this, suppose player i has valuation @, and player j follows the bidding strategy given above Note that player i can’t bid by > 1/2 as an optinal bid as bidding by ~ 1/2 is beter. When he bids b, € [0.1/2], player 1's expected payoff is ayy) = (8g = dg) -PEOBLE,/2 ¢ is doainated by #, Similarly it is doainaced to bid § < #, so all bidders bid their true valuation. These are the same bids as under risk neutrality so the revenue collected is the same. (b) As in example 6.6 the equilitrium must be of the form: type # bids 9 type J chooses s from distritz: on F(s) on (8,5) For the mixed strategy to be a best reszonse type J must be indifferent between all possible bids. uF - s)(p + pF(s)) + PCL - Frs))u(0) = Constanz Setting s = # ve see chat che constant is uF - 8p + puco) Solving, p uF-8) + u(F-s) F(s) = BP u(B-s) - (0) From equation (6.10) of example 6.6 we can see that the solution with risk neutrality is F(s) = = P As u is concave, u’ is decreasing so w(e) = wid) - u(b) - u(a) o-6 boa when a

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