Games, Information and Strategy (14/16)



Integrative Framework
Information Asymmetry
Strategic Moves: Non-cooperative Games
(Compellence, Deterrence) X (Promises, Threats)

Cooperative Games & Negotiation

Mechanism Design & Deal Structuring


Socially Optimal?

slides. movie Dr. 7-9pm)  Covering Ch1-10. Strangelove (04/19)   Parts 3 & 4 and Other Applications  Sessions 11-16 Final Exam  Session 17 or 18 4 .Course Schedule   Parts 1 & 2  Sessions 1-5 Part 3  Sessions 6-9  Midterm Exam (2 hours)  Session 10 (04/26.

Main Themes (1/2)  Part 1: Introduction and general principles  Basic ideas and examples  How to think about strategic games  Part 2: Concepts and techniques       Rationality and equilibrium Non-cooperative and cooperative games Sequential and simultaneous moves Discrete and continuous strategies Zero-sum and non-zero-sum games Pure and mixed strategies 5 .

Main Themes (2/2)  Part 3: Some broad classes of games and strategies       Uncertainty and information Strategic moves Prisoners’ dilemma and repeated games Collective-action games Evolutionary games Mechanism design  Part 4: Applications to specific strategic situations      Brinkmanship Strategy and voting Bidding strategy and auction design Bargaining Markets and competition 6 .

Strategy and Voting 7 .

Using different metric such as interests. Social choice theory is a growing discipline started by Keneth Arrow who originated the study following his introduction of the impossibility theorem in 1951. 8 . social choice theory aims to determine the optimal rules of structuring a fair voting framework.essentially a preference ranking of the scenarios that are possible to society. Social choice theory is the philosophical and mathematical study of the type of conclusions that can determined through various aggregation methods. negotiations and other economic processes. values and welfare.Social Choice   Individual preferences are aggregated to produce a social welfare function . This theory is applicable to group decision making.

religious.Democracy  Participation  Voting: necessary condition  Purpose: to avoid suppression  Freedom      Natural rights? Premise for participation Political. speech… Self-defense Purpose: efficiency and innovation Premise for voting Law? Procedure? Opportunity? Property? Moral appeal Against inequity 9  Equity     . economic.

Ends and Means  Ends (objectives)  Justice. ideal  Self-fulfillment. self-control   Means (methods)  Voting and Social choice Examples  Plato  “Philosopher King”: Education? Institution?  Karl Marx  Dictatorship of the proletariat無產階級專政 (人民民主專政) 10 . self-dignity.

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Democratic Institution  Republic (Madison)  「一個政府所擁有的權力是直接或間接從最多數的民眾而 來,且在有限制的期間內由具有良好行為且樂意的民眾擔 任公職」   民意(popularness): 必要條件 (for participation and equity) 選舉和任期限制: 充分條件(for freedom)    No other conditions! We deserve it! Liberal (自由主義) and populist (民粹主義) interpretation of voting 12 .

Main Themes     Voting rules and procedures and some nonintuitive or paradoxical results that can arise in certain situations Criteria used to judge the various voting methods Strategic behavior of voters and the scope for outcome manipulation Median voter theorem 13 .

Voting Rules and Procedures  Binary Methods           Majority rule Pairwise voting and multistage Condorcet method: a complete round-robin of majority rule Copeland index: first round of the World Cup soccer tournament Amendment procedure (pairwise procedure for three possible alternatives) Positional methods: assigning points Plurality rule: single vote for most-preferred alternative Antiplurality method Borda count Approval voting  Plurative methods  Mixed methods  Majority runoff (2 stages)  Successive rounds to eliminate the worst alternative until two alternatives remain for final majority runoff  Single transferable vote  Proportional representation  Hare procedure (single transferable vote)  Strategic voting (strategic misrepresentation of preferences) 14 .

∵ (A:B:C = 180:225:195)  Majority runoff: winner C. 35 voters (C > B > A)  Simple plurality rule: winner A.g.. C)  (A. ∵ (A. ∵ (A:B:C = 40:25:35)  Borda count (3-2-1 points): winner B. B. the appointment or election of the chair)  In an election with at least 4 alternatives when one is removed  100 voters for candidates A. change the outcome . B and C  Preference order: 40 voters (A > B > C).Voting Paradoxes   The Condorcet Paradox  Intransitive ordering The agenda paradox  Example: binary voting procedure for three alternatives  Setting the agenda is the real game (e. 25 voters (B > C > A). C)  C 15   The reversal paradox Change the voting method.

Preferences over Welfare Policies Left Generous Average Limited Center Average Limited Generous (Intransitive ordering) Right Limited Generous Average Individual ranking (5 = best) X Y Z Total points 12 9 11 7 Individual ranking (4 = best) X Y Z Total points 9 10 6 5 A B C D 5 4 3 2 5 4 3 1 2 1 5 4 A C D E 4 3 2 1 4 3 1 2 1 4 3 2 E 1 2 3 6 16 .

the simplified form states that we cannot have independence of irrelevant alternatives (IIA) without dictatorship. The ranking must not be imposed by external considerations (such as customers) independent of the preferences of individuals in the society. IIA: violated by single transferable-vote procedure. Borda count Relax Arrow’s principles? Compromise? 17 . It must be transitive. It must not be dictatorial – no single voter should determine the group ranking. No truly fair voting method can be found without violating some apparently reasonable aggregation requirement. 4. And it should be independent of irrelevant alternatives – that is.     The theorem is abbreviated by imposing the first four conditions and focusing on the difficulty of simultaneously obtaining the last two. 2. The social or group ranking must rank all alternatives (be complete). 3. It should satisfy a condition known as positive responsiveness. 5.or Preference Aggregation Method   Kenneth Arrow’s Impossibility Theorem No preference aggregation method satisfies all six of the critical principles at the same time: 1. or the Pareto property – in which unanimous preferences within the electorate are reflected in the aggregate ranking.Vote. no change in the set of candidates (addition to or subtraction from) should change the rankings of the unaffected candidates. 6.

Concerning Paradoxes  Black’s condition (by Duncan Black)    Single-peaked preferences: restriction to prevent the Condorcet paradox Condition: alternatives can be ordered along some specific dimension Pairwise (majority) voting satisfies Arrow’s transitivity condition Measured by considering how often a voting procedure that is nondictatorial and that satisfies IIA as well as the Pareto property also satisfies the requirement of transitivity of its social ranking Simple majority rule: maximally robust Borda count Plurality rule  Robustness (by Partha Dasgupta and Eric Maskin)      Intensity ranking (Donald Saari) 6’ IBI (intensity of binary independence): Society’s relative ranking of any two alternatives should be determined only by (1) each voter’s relative ranking of the pair and (2) the intensity of this ranking  Weaker than IIA: applying IIA only to such additions or deletions of “irrelevant” alternatives that do not change the intensity of people’s preferences between the “relevant” ones  Borda count: ties can occur through Condorset terms prevented by single-peak preferences) or reversal terms (prevented by using only ballots for the full set of candidates)    Condorcet criterion Consistency criterion Lack of manipulability 18 .

Ralph Nader in 2000 election (Gore-Bush-Nader)  Plurality in separate constituencies vs. Italy: often no party has a clear majority of seats  Pairwise voting  Agenda-setting chair  Voters’ misrepresentation of preferences  Borda Count  Remedy: Ballots are open to public scrutiny in sports award elections (using the fear of public reprisal to keep voters “honest” in the elections). proportional representation of the whole population: ( two major parties and tyranny of the majority) vs. presidential election (Bush-Clinton-Perot).S. ( several parties and inconclusive bargaining of power and legislative gridlock)  Britain: Conservative-Labor-Liberal.  With incomplete information  Strategy conditioned on the beliefs about the distribution of the different preference orderings among the other voters and on the beliefs about how truthful other voters will be  Truthful voting is a dominant strategy for all voters in the final round.Strategic Manipulation of Voting  Plurality rule  Spoiler: Ross Perot in 1992 U. 19 .

Election Outcomes in Two Possible Second-Round Votes Right votes For A: Left A G Center A A A G A G Left For G: A G Center A A G G G G Right votes For L: Left A G Center A A A G A G Left For G: A G Center A A A G A G Election Outcomes Based on First-Round Votes Right votes For A. Left A L Center A G G L G L For L: Left A L Center A G L L L L 20 .

If there are three or more alternatives to consider. Weakening the IIA assumption to help voting procedures satisfy Arrow’s conditions makes way for more manipulable procedures. the amendment procedure. Often reduced to a consideration of which procedures can simultaneously satisfy nondictatoship and IIA Approval voting. given a voting method that is itself manipulable. majority rule. the only voting procedure that prevents strategic voting is dictatorship: one vote is assigned the role of dictator and his preferences determine the election outcome.Concerning Manipulation   Arrow’s theorem     Does not require nonmanipulability Procedures satisfying Arrow’s IIA assumption most immune to strategic manipulation The situations with small numbers of informed voters and smaller sets of available alternatives may be most susceptible to manipulation. the Hare procedure (single transferable vote) Depends only on the amount of information necessary to manipulate a voting system and is not based on the ease of putting such information to good use or whether manipulation is most easily achieved by individual voters or groups In practice. the Borda count. the manipulation of plurality rule by individual voters is quite difficult William Vickrey  Gibbard-Satterthwaite theorem   Arrow’s theorem   In decreasing order of manipulability    21 .

or on a onedimensional spectrum of political differences. 22 .The Median Voter Theorem    In election with only 2 candidates Principle of minimum differentiation Discrete political spectrum  Symmetric distribution  Asymmetric distribution  Continuous political spectrum  Uniform distribution  Normal distribution  Limitation  It applies when there is just one issue.

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Bidding Strategy & Auction Design 25 .

fish  Sealed bid  First-price auction  Second-price auction (Vickrey auction)  Others  The highest bidder wins but the top two bidders pay their bids  The highest bidder wins but all bidders pay their bids  Auction environments  Valuation  Common-value or objective-value auction: oil-drilling tract. Sotheby’s. Internet  Dutch or descending auction (using clock): flowers.Types of Auctions  Auction rules  Open outcry  English or ascending auction (with or without auctioneer): Christie’s. interest rate for bond traders  Private-value or subjective-value auction: antique a necklace worn by Princess Diana 26 .

08 billion. average worth b/2 Worth 50% more under your control.75b < b still Why existing management not bid against you? You will win the takeover battle only when it is not worth winning?  Advice of two questions  “Would I be willing to purchase the tract of land for $1. 1. real worth between 0 and b.08 billion for it?”  Similar to adverse selection  How much should we shade down our bidding to take into account the winner’s curse? 27 .08 billion.The Winner’s Curse   In common-value auction Example: bidding for a company     Accepted bidding price b. given what I know before submitting my bid?”  “Would I still be willing to purchase the tract of land for $1. given what I know before submitting my bid and given the knowledge that I will be able to purchase the land only if no one else is willing to bid $1.5 * b/2 = 0.

Bidding Strategies  Standard open-outcry English auction  The valuation of the second-highest bidder (difference: the minimum bid increment defined in the auction rule)  First-price sealed-bid auction  Shading bid (increases profit margin if success but lowers chances of being the high bidder)   Dutch auction  Similar to first-price sealed-bid auction Second-price sealed-bid auction  Truthful bidding (dominant strategy)  Vickrey’s Truth Serum: truthful bidding 28 .

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1) [P(x)]n -1 = x. Your bid is wasted unless you win.All-Pay Auctions  Examples  Olympic games  Political contests  Lottery  Common-value. equilibrium strategy bid: random and uniformly distributed over the whole range from 0 to 1  n = 3.  The sum of all the bids often exceeds the value of the prize by a large amount. sealed-bid. the prob of bidding 4 or less is 1/2  Any player’s average or expected bid: 1/n  Rule  Mixed strategy 30 .  Destructive competition?  No bidding cannot be an equilibrium      n bidders Common-value object worth 1 Bid x. or P(x) = x 1/(n -1) n = 2. a continuous variable in the interval (0. first-price auction in which every bidder pays his bid.

How to Sell at Auction (1/3)  Auction as a sequential-play game  Setting of the rule. then bidding  Setting a reserve price  Auction environment is critical to seller revenue  Truthful bidding  Bidders’ attitudes toward risk and their belief about the value  Possibility of collusion among bidders  Political considerations when selling public property (drilling rights) 31 .

sealed-bid revenue.  Experimental evidence  Advanced mathematical techniques needed to prove that revenue equivalence can be extended to Dutch and first-price. sealed-bid auctions  Dutch auction prices lower on average than first-price. sealed-bid auctions but not in English auctions (When people have to specify a price. sealed-bid auction prices (some positive utility associated with suspension factor?)  Overbidding in second-price.How to Sell at Auction (2/3)  Risk-neutral bidders and independent estimates  Least complex. no winner’s curse  Revenue equivalence: Four auction methods would yield same expected prices. (additional bidder interest or impatience in the course of a 5-day auction)  Near revenue equivalence for the other two auction types 32  Field evidence from Internet auctions . these sealed-bid auctions seem to draw more attention to the relationship between the bid price and the probability of ultimately winning the item)  Dutch auction revenue as much as 30% higher on average than firstprice.

more concerned about the losses caused by underbidding – losing the objects – than by the costs associated with bidding at or close to their true valuation  First-price sealed-bid auction: shading down bids less  Dutch auction: waiting less to bid  Relevant for common-value auctions  Positively correlated (assuming a large number of bidders)  Correlated estimates  Negatively correlated (small number of bidders with potentially very different valuations)  Dutch auction  First-price sealed-bid structure  Pessimism: second-price.How to Sell at Auction (3/3)  Risk-averse bidders (with bids and beliefs uncorrelated)  Bidders generally want to win. sealed-bid auction)  Optimism: English auction (in the feverish bidding process) 33 . sealed-bid auction (shading down bids more in first-price.

sealed bid auction)  Seller’s private information (about a common-value object)  Concealment even of favorable information usually deemed as a negative signal to buyers  Disclosure reduces bidders’ shading and the effects of winner’s curse  Honesty is often the best policy 34 .Some Added Twists to Consider  Multiple objects  Independent valuation or package valuation  Example: real-estate development  A (square in shape) : 4 sq acres = 16 quarter-acre blocks : corner lots  lots on each side…  B: 4 sq acres = a full block  2 individual 2-acre lots  4 1-acre lots …  Developers’ bidding strategy? Risk of being beaten in just one round?  Defeating the system  Vickrey auction  Collusion among bidders (to submit low second-highest bid)  Countered by setting reserve prices  Multi-person prisoners’ dilemma  Cheating more difficult to detect  Sustaining collusion in repeated game  First-price sealed-bid less vulnerable to bidder collusion  Information disclosure on seller’s side  Shilling: Seller planting false bids to inflate the final bid price (in English auction and in second-price.

advertising revenues Most useful for selling goods available in limited quantity  There is unknown demand  The seller cannot easily determine an appropriate price  Matching process to find “market prices”  Auction rules  English auction and second-price. seller commissions. sealed bid popular  Proxy-bidding like second-price sealed-bid (auction site displaying only one bid increment rather than the reservation price)  Dutch auction rare in use. So eBay preferable  Sellers may get better prices at Amazon. Bidders bid earlier at Amazon 35  Auction-ending rules .Auctions on the Internet   eBay as No. Only a few retail sites (Land’s End) posting with successively reducing prices for overstocked items  Yankee auctions (for multiple identical units in a single auction): each paying bid price per unit or (with “Dutch auction label) the lowest winning bid price     Most often 7 days Hard end time (eBay) Soft end time: extension if a new bid received within 10 mins (Amazon) Bidders hiding private information and bidding late (sniping). 1  Listing fees.

$78 billion (as of Nov.)  Designing the rules  Prevention of monopoly and promotion of small businesses  Open auctions: benefit of efficiency and positively correlated estimates vs. cost from collusion  Simultaneous multiple rounds  No package (or combinatorial) bidding.S.The Airwave Spectrum Auctions (U. 2008)  Two specific bidding issues  Default: increased competition and overbidding  Bid rigging: code bidding (last 3 digits) and electronic system 36 . maybe in future  Reserve prices  Deposit (20% of bid) to bid as down payment (within 5 days of the auction) and to incur penalties for defaulting on a winning bid  Installment payment plans “bidding credits” of 25% to 35% for small businesses  “Entrepreneurs’ blocks” held for bidders under a given financial level  How the auctions have fared  Government total revenue $23 billion (1994-1998).

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aspx?DiscId=6 Ch 16 & 17: Unsolved questions (optional) 38 .05/31 Assignment    Ch 16 & 17: Solved questions http://www.com/studyspace/disciplin es/economics.wwnorton.

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