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Zhenyu Lai
December 14, 2009
1.2 Dominance
∙ Pure strategy 𝑠𝑖 is strictly dominated if there exists 𝜎𝑖′ such that 𝑢𝑖 (𝜎𝑖′ , 𝜎−𝑖 ) >
𝑢
(𝑖 (𝑠𝑖 , 𝜎−𝑖 ) for all 𝜎−𝑖 )
𝑢𝑖 (𝜎𝑖′ , 𝜎−𝑖 ) > 𝑢𝑖 (𝑠𝑖 , 𝜎−𝑖 ) ∀𝜎−𝑖 ≡ 𝑢𝑖 (𝜎𝑖′ , 𝑠−𝑖 ) > 𝑢𝑖 (𝑠𝑖 , 𝑠−𝑖 ) ∀𝑠−𝑖 )
2
∙ In mixed strategy NE 𝜎, 𝑖 gets same payoff from playing any 𝑠𝑖 ∈ 𝑠𝑢𝑝𝑝𝑜𝑟𝑡(𝜎𝑖 )
when other players remain 𝜎−𝑖 , i.e. 𝑢𝑖 (𝜎𝑖 , 𝜎−𝑖 ) = 𝑢𝑖 (𝑠𝑖 , 𝜎−𝑖 ) = 𝑢𝑖 (𝑠′𝑖 , 𝜎−𝑖 )
(i.e. mixed strategy NE exists only if BOTH players randomize)
∙ Odd number of NE (usually)
3
1.4.1 Replicator Dynamic
Let 𝜙𝑡 (𝑠) be measure of players using pure strategy 𝑠 at date 𝑡
Let 𝜃𝑡 (𝑠) = ∑ 𝜙′ 𝑡𝜙(𝑠) ′
𝑡 (𝑠 )
be fraction of population playing strategy 𝑠
𝑠
˙
𝜃(𝑅) = 𝜃(𝑅)[𝜃(𝑅) + 2𝜃(𝑆) − 1 ]
˙
𝜃(𝑆) = 𝜃(𝑆)[1 − 𝜃(𝑆) − 2𝜃(𝑅) ]
˙
𝜃(𝑅) = [𝜃∗ (𝑅) + Δ𝜃(𝑅) ][𝜃∗ (𝑅) + Δ𝜃(𝑅) + 2𝜃∗ (𝑆) + 2Δ𝜃(𝑆) − 1 ]
1 2
= Δ𝜃(𝑅)𝜃∗ (𝑅) + 2Δ𝜃(𝑆)𝜃∗ (𝑅) = Δ𝜃(𝑅) + Δ𝜃(𝑆)
3 3
˙ 2 1
𝜃(𝑆) = −2Δ𝜃(𝑅)𝜃∗ (𝑆) − Δ𝜃(𝑆)𝜃∗ (𝑆) = − Δ𝜃(𝑅) − Δ𝜃(𝑆)
3 3
(˙ ) ( 1 2
)( )
𝜃(𝑅) 3 3
Δ𝜃(𝑅)
=
˙
𝜃(𝑆) − 23 − 13 Δ𝜃(𝑆)
Find Eigenvalues: 9𝜆2 + 3 = 0. Because real part = 0, system is degenerate.
If 𝜖 > 0: Unstable steady state NE. trajectories spiral out to simplex boundary.
If 𝜖 < 0: Asymptotically stable steady state NE for small 𝜖.
If 𝜖 = 0: cylicle behavior. Center is ESS only if 𝜖 > 0
(Note: 𝜖 here is when matched to self. Signs flip if payoff = 1 + 𝜖)
4
R S P
R (0,0) (1,-1) (-1,1)
S (-1,1) (0,0) (1,-1)
P (1,-1) (-1,1) (0,0)
∙ Every NE is a steady state. (Same average payoff. Constant pop share)
∙ Interior steady states must be NE. Boundary SS not necessarily NE.
∙ Non-Nash SS cannot be asymptotically stable. Perturbation grows share.
∙ No guarantee that replicator converges. But if they do, converge to NE.
5
1.6.1 Setup
→
∙ Correspondence 𝑟 : 𝑋 → 𝑌 is function from X to set of all subsets of Y.
→ ∑
∙ Fixed point 𝑟 : 𝑋 → 𝑋 such that 𝑥 ∈ 𝑟(𝑥). X is space of 𝜎(⋅)
∙ Set of agent 𝑖’s reaction correspondence BR: 𝑟𝑖 (𝜎) = arg max𝜎𝑖′ 𝑢𝑖 (𝜎𝑖′ , 𝜎−𝑖 )
∙ Correspondence because multiple BR. 𝑟𝑖 (𝜎) just depends on 𝜎−𝑖 , not 𝜎.
∙ Sufficiency by Kakutani’s fixed point theorem: Map 𝑟 has fixed point.
→
∙ Graph of correspondence 𝑟 : 𝑋 → 𝑌 is the set of ordered pairs
1.6.2 Proof
To use Kakutani sufficiency, prove 4 conditions:
∑
1. is a compact, convex, non-empty, finite-dimensional space.
3. 𝑟 is convex-valued.
6
Proof. Suppose graph is not closed. Then, ∃ sequence (𝜎 𝑛 , 𝜎 ˆ 𝑛 ) → (𝜎, 𝜎
ˆ)
𝑛 𝑛
such that 𝜎 ˆ ∈ 𝑟(𝜎 ) for all 𝑛 but 𝜎ˆ∈ / 𝑟(𝜎). Then, ∃ player 𝑖 such that
/ 𝑟𝑖 (𝜎), so ∃𝜖 > 0 and a 𝜎𝑖′ such that
𝜎ˆ𝑖 ∈
𝑢𝑖 (𝜎𝑖′ , 𝜎−𝑖
𝑛
) > 𝑢𝑖 (𝜎𝑖′ , 𝜎−𝑖 ) − 𝜖 > 𝑢𝑖 (ˆ 𝜎𝑖𝑛 , 𝜎−𝑖
𝜎𝑖 , 𝜎−𝑖 ) + 𝜖 > 𝑢𝑖 (ˆ 𝑛
)
ˆ 𝑛 ∈ 𝑟(𝜎 𝑛 )
This contradicts the assumption that 𝜎
1.6.3 Intuition
Consider a family of games with the same finite strategy spaces 𝑆, and payoff
functions {𝑢𝑖 (𝑠, 𝜆) }𝑖∈𝐼 that are continuous functions of a parameter 𝜆, where
𝜆 lies in a compact set Λ. Then the correspondence 𝐸 that maps each 𝜆 to the
set of Nash equilibria for {𝑢𝑖 (𝑠, 𝜆) }𝑖∈𝐼 has closed graph. Loosely speaking, the
set of equilibria cannot suddenly shrink when in the limit 𝜆𝑛 → 𝜆.
L R
U (1,1) (0,0)
D (0,0) (𝜆,𝜆)
Number of equilibria can grow: 𝜆 < 0: 1 NE, 𝜆 = 0: 2NE, 𝜆 > 0: 3 NE
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– Asymmetric - If 𝑥 ≻ 𝑥′ then not 𝑥′ ≻ 𝑥
– Transitive - If 𝑥 ≻ 𝑥′ and 𝑥′ ≻ 𝑥′′ , then 𝑥 ≻ 𝑥′′ .
∙ Precedence relation in game tree need not correspond to calendar time.
∙ Each node (except initial) has a unique “immediate predecessor ”
8
Theorem 4 (Kuhn). In a game of perfect recall, every mixed strategy is
equivalent to the behavior strategy it generates and every behavior strategy is
equivalent to every mixed strategy that generates it.
Proof. 1 Construct 𝑏𝑖 (𝑎∣ℎ) from 𝜎𝑖 . 2 Let 𝑅𝑖 (ℎ) be set of 𝑖’s pure strategies
that do not preclude ℎ ∈ 𝐻𝑖 , ie reach ℎ 3 If 𝜎𝑖 (˜(𝑠𝑖 )) > 0, bayesian update.
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3. Different agents in role of different player can have different beliefs
4. Nature’s distribution not known a priori but has to be learnt. Even in
the 2 player game, players can have different beliefs about nature.
∙ SCE just requires each player 𝑖 to have any distribution of beliefs 𝜇𝑖 (𝑠𝑖 )
to rationalize each 𝑠𝑖 in the support of 𝜎 𝑖 . (e.g. many rep consumers)
∙ Unitary SCE requires each player 𝑖 to have the single belief 𝜇𝑖 about all
his strategies 𝑠𝑖 . (e.g. single govt actor) 𝑠𝑖 ∈ 𝑠𝑢𝑝𝑝𝑜𝑟𝑡(𝜎)
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2.4.4 Example: Classic SCE Game
1 chooses {𝐴1 , 𝐷1 }
2 chooses {𝐴2 , 𝐷2 }
If (𝐴1 , 𝐴2 ), payoff = (1,1,1)
If 𝐷1 or 𝐷2 , 3 gets to play L: payoff = (3,0,0) or R: payoff = (0,3,0)
∙ (𝐷1 , 𝐴2 , 𝐿), (𝐴1 , 𝐷2 , ( 12 𝐿, 12 𝑅)) are NE & SCE (beliefs always correct)
Theorem 6 (Kuhn 1953). A finite game of perfect info has a pure strategy NE
Proof. Proof by backward induction to construct SPE. Need finite node to
start. Use continuity of player 2’s payoff and compactness of player 2’s action
set to ensure existence of BR. With perfect info, we can BI compute play.
∙ In SPE, all players expect the same NE, but cannot deduce which NE
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Theorem 7 (No Profitable One-Stage-Deviation). In a finite multi-stage
game with observed actions, strategy profile s is a SPE iff
No profitable OSD: there is no player i, and no 𝑠ˆ𝑖 that equals 𝑠𝑖 , except at a
single (𝑡, ℎ𝑡 ), such that 𝑢𝑖 ((ˆ
𝑠𝑖 , 𝑠−𝑖 )∣ℎ𝑡 ) > 𝑢𝑖 ((𝑠𝑖 , 𝑠−𝑖 )∣ℎ𝑡 ).
Proof. Necessity: Suppose OSD at ℎ𝑡 , then 𝑠 does not yield NE in subgame
starting at ℎ𝑡 , so not SPE.
Sufficiency: Suppose 𝑠 not SPE, then ∃(𝑡∗ , ℎ𝑡∗ ) where 𝑠 is not a NE. Thus, ∃
player 𝑖 and a strategy 𝑠′𝑖 better than 𝑠𝑖 , conditional on ℎ𝑡∗ being reached.
Definition 6. A (multi-stage) game is continuous at infinity iff
( )
∞ ∞
∀𝑖, 𝑙𝑖𝑚𝑡→∞ 𝑠𝑢𝑝over ℎ∞ ,ℎ̂∞ that agree for the first 𝑡 periods ∣𝑢𝑖 (ℎ )−𝑢𝑖 (ℎ̂ )∣ = 0
12
∙ Since player 2 never offers player 1 a share > 𝛿1 𝑣 1 , 𝑤 1 ≤ 𝛿1 𝑣 1
∙ Thus, 𝑣 1 ≤ 1 − 𝛿2 𝑣 2 (1)
∙ By symmetry, 𝑣 2 ≤ 1 − 𝛿1 𝑣 1 (2)
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2.7 Minmax
∙ Player 𝑖’s “minmax value” 𝑣 𝑖 = min𝛼−𝑖 [𝑚𝑎𝑥𝑎𝑖 𝑔𝑖 (𝑎𝑖 , 𝛼−𝑖 ) ]
∙ Player 𝑖’s payoff is at least minmax in any static eqm or Nash eqm
∙ Pure strategy mutual minmax: action 𝑎∗ such that max𝑎′𝑖 𝑔𝑖 (𝑎′𝑖 , 𝑎∗−𝑖 ) ≤ 𝑣 𝑖
∙ Eqm strategies have to use rewards if no pure strategy mutual minmax
– Respond to deviation by playing 𝑎∗ for 𝑇 periods
– Check punishment period is long enough that no incentive to
deviate on eqm path
– Punishment period is short enough that each player 𝑖’s value at
start of punishment phase exceeds 𝑣 𝑖
∙ Use public randomizing device to coordinate correlated strategy.
∙ Single public randomization at start convexifies set of eqm outcomes
∙ Allowing public randomizations at later stages can introduce SPE that
are not in convex hull of equilibria of original game.
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Definition 7. Graph(B) is the set where all SR players are playing static BR
in every period.
𝐵 : 𝐴1 × . . .𝑗 ⇒ 𝐴𝑗+1 × . . . × 𝐴𝑛
( )
minmax 𝑣 𝑖 = min max 𝑔𝑖 (𝑎𝑖 , 𝛼−𝑖 )
𝛼∈𝑔𝑟𝑎𝑝ℎ(𝐵) 𝑎𝑖
Proof. Let 𝑎𝑖 be probability that player 𝑖 plays “first” pure strategy. For some
player 𝑖, it must be the case that for 𝑗 ∕= 𝑖 ∕= 𝑘, either 𝑎𝑗 ≥ 12 and 𝑎𝑘 ≥ 21 or
𝑎𝑗 ≤ 21 and 𝑎𝑘 ≤ 12 . But since player 𝑖 can obtain any convex combination of
𝑎𝑗 𝑎𝑘 and (1 − 𝑎𝑗 )(1 − 𝑎𝑘 ) as a payoff, he can get a payoff of at least 14 .
15
𝐼𝑛 Out
Build (1.5,−1) (3.5,0)
Don’t (2,1) (3,0)
Let 𝑝 = p(high cost), Let 𝑥 = p(1 builds ∣ low cost), Let 𝑦 = p(2 enters)
1
1 builds (x=1): 1.5𝑦 + 3.5(1 − 𝑦) > 2𝑦 + 3(1 − 𝑦) ⇒ 𝑦<
2
1
2 enters (y=1): 𝑝 + (1 − 𝑝)[−𝑥 + (1 − 𝑥)] > 0 ⇒ 𝑥<
2(1 − 𝑝)
Solve:
(x=0, y=1) is an equilibrium for any 𝑝.
(x=1, y=0) is an equilibrium if 𝑝 ≤ 12 .
1
(𝑥 = 2(1−𝑝) , 𝑦 = 12 ) is a mixed-strategy equilibrium if 𝑝 > 12 .
Convex hull for set of points X: minimal convex set that contains X. (i.e.
contains all possible convex combination of all the different equilibriums)
Definition 8. A Bayesian Nash equilibrium of an incomplete information
game with types 𝜃𝑖 ∈ Θ𝑖 , prior 𝑝 on Θ = ×𝑖 Θ𝑖 , pure strategy spaces 𝑆𝑖 , and
payoff functions 𝑢𝑖 : 𝑆 × Θ → ℛ, is a Nash equilibrium of the “expanded
game”, which is a strategic-form game with pure strategy spaces 𝑆𝑖Θ𝑖 (the set of
maps from Θ𝑖 to 𝑆𝑖 ) and payoff function 𝐸𝑝 𝑢𝑖 (𝑠(𝜃), 𝜃). So, 𝑠(⋅) is a pure
strategy Bayesian equilibrium if for each player 𝑖
∑ ( )
( ′ )
𝑠𝑖 (⋅) ∈ arg max 𝑝(𝜃)𝑢𝑖 𝑠𝑖 (𝜃𝑖 ), 𝑠−𝑖 (𝜃−𝑖 ) , 𝜃
Θ𝑖
𝑠′𝑖 ∈𝑆𝑖 𝜃
∙ Assume all types have positive probability so prior has full support.
∙ Thus, maximizing conditional expected payoff for every 𝜃𝑖 implies
maximizing ex-ante expected payoff. (⇐ all types have +ve probability)
∙ Nash existence thm applies. Finite Bayesian games have NE
∑ ∑ ( )
𝑠′𝑖 (𝜃𝑖 ), 𝑠−𝑖 (𝜃−𝑖 )
( )
𝑠𝑖 (⋅) ∈ arg max 𝑝(𝜃𝑖 ) 𝑝(𝜃−𝑖 ∣𝜃𝑖 )𝑢𝑖 ,𝜃
Θ𝑖
𝑠′𝑖 ∈𝑆𝑖 𝜃𝑖 𝜃−𝑖
( )
(𝜃ℎ −𝑏) (1 − 𝑝) + 𝑝𝐹 (𝑏) = (𝜃ℎ − 𝜃𝑙 − 𝜖)(1 − 𝑝)
| {z } | {z } | {z }
low type loses to high type p(beating high-type opponent payoff from bidding 𝜃𝑙 +𝜖
16
1 − 𝑝 𝑏 − 𝜃𝑙
𝐹 (𝑏) = ⋅
𝑝 𝜃ℎ − 𝑏
Solve for highest bid in distribution by setting F(b) = 1 (no mass points)
𝑏 = (1 − 𝑝)𝜃𝑙 + 𝑝𝜃ℎ < 𝜃ℎ
3.2 Monotonicity
∙ With a continuum of actions, higher types play higher actions
∙ With a discrete set of actions and continuum of types, “cutoff rules”
exist: lowest interval of types play lowest action.
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∙ Showing monotonicity, if 𝑐′′ > 𝑐′ , then 𝑏′′1 > 𝑏′1
∫ 1
𝑏1 + 𝑏2
max ( − 𝑐)𝑓2 (𝑏2 )𝑑𝑏2
𝑏1 𝑏1 2
∫ 𝑏(𝛼) ∫ 𝑏(𝛼)
𝑑 ∂ 𝑑𝑏(𝛼) 𝑑𝑎(𝛼)
Use Leibniz rule: 𝑓 (𝑥, 𝛼)𝑑𝑥 = 𝑓 (𝑥, 𝛼)𝑑𝑥+ 𝑓 (𝑏(𝛼), 𝛼)− 𝑓 (𝑎(𝛼), 𝛼)
𝑑𝛼 𝑎(𝛼) 𝑎(𝛼) ∂𝛼 𝑑𝛼 𝑑𝛼
1
FOC: [1 − 𝐹2 (𝑏1 )]−(𝑏1 −𝑐)𝑓2 (𝑏1 ) = 0 (many possible solutions, not Lipschitz continuous)
2
Strictly increasing equilibrium strategies (hence invertible):
1 𝑑𝑠−1
2 (𝑏2 ) 1
Inverse function theorem : (𝑓 −1 )′ (𝑏) = ′ ⇒ = 𝑑𝑠2 (𝑣)
𝑓 (𝑎) 𝑑𝑏2
| {z } 𝑑𝑣
| {z }
where 𝑏=𝑓 (𝑎) notice 𝑏2 =𝑠2 (𝑣)
𝑏 − 𝛼𝑖 𝑝𝑖 (𝑠−1
𝑖 (𝑏)) 1
𝐹𝑖 (𝑏) = 𝑃𝑖 (𝑠−1 −1
𝑖 (𝑏)) = 𝑠𝑖 (𝑏) = 𝑓𝑖 (𝑏) = 𝑑𝑠𝑖
=
𝛽𝑖 𝑑𝑏
𝛽𝑖
1
FOC: (𝜃−𝑏)𝐺′ (Φ(𝑏))Φ′ (𝑏) = 𝐺(Φ(𝑏)) where 𝜃 = Φ(𝑏), 𝑏 = 𝑠(𝜃), Φ′ (𝑏) =
𝑠′ (𝜃)
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𝑑
𝜃𝐺′ (𝜃) = 𝐺(𝜃)𝑠′ (𝜃) + 𝑠(𝜃)𝐺′ (𝜃) = 𝐺(𝜃)𝑠(𝜃)
𝑑𝜃
∫ 𝜃
Integrating both sides, 𝑠(𝜃)𝐺(𝜃) = 𝑡𝐺′ (𝑡)𝑑𝑡 + 𝑘
𝜃
𝑁 −1
𝑃 ˜𝑈 [0, 1], 𝑃 (𝑥) = 𝑥, 𝐺(𝑥) = 𝑥𝑁 −1 , 𝐺′ (𝑥) = (𝑁 − 1)𝑥𝑁 −2 ⇒ 𝑠∗ (𝜃) = 𝑁 𝜃
19
Theorem 12 (Harsanyi 1973). For a set of payoff vectors,
{𝑢𝑖 (𝑠)}𝑠∈𝑆,𝑖∈𝐼 ∈ ℛ#𝐼⋅#𝑆 of Lebesgue measure 1, for all independent priors on
Θ1 × . . . × Θ𝐼 with differentiable, strictly positive densities, and any
equilibrium 𝜎 of the complete-information game with payoffs 𝑢, the distribution
over 𝑆 induced by 𝜎 is the limit, as 𝜖 → 0, of the distributions over 𝑆 induced
by a sequence of pure-strategy equilibria of the corresponding Bayesian games.
For a fixed strategy space 𝑆, set of payoffs {𝑢𝑖 (𝑠)}𝑠∈𝑆,𝑖∈𝐼 ∈ ℛ#𝐼⋅#𝑆 of
Lebesgue measure 1
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𝑝(𝜃)𝜎1∗ (𝑎1 ∣𝜃) ∑
Bayes: 𝜇(𝜃∣𝑎1 ) = ∑ ′ ∗ ′
𝑖𝑓 𝑝(𝜃′ )𝜎1∗ (𝑎1 ∣𝜃′ ) > 0
𝜃 ′ ∈Θ 𝑝(𝜃 )𝜎1 (𝑎1 ∣𝜃 ) 𝜃 ′ ∈Θ
∑
𝜇(𝜃∣𝑎1 ) is any probability distribution on Θ 𝑖𝑓 𝑝(𝜃′ )𝜎1∗ (𝑎1 ∣𝜃′ ) = 0
𝜃 ′ ∈Θ
PBE is simply a set of strategies and beliefs such that at any stage of the
game, strategies are optimal given the beliefs. And the beliefs are obtained
from equilibrium strategies and observed actions using Baye’s rule.
PBE vs BNE: In signaling game rules out any equilibria in which: following a
0-probability 𝑎1 , player 2 uses an 𝑎2 that isn’t a BR for any belief.
4.1.3 Monotonicity
Let 𝜎1′ and 𝜎1′′ denote eqm strategies of types 𝜃′ and 𝜃′′
Let 𝑎′1 ∈ 𝑠𝑢𝑝𝑝𝑜𝑟𝑡(𝜎1′ ) and 𝑎′′1 ∈ 𝑠𝑢𝑝𝑝𝑜𝑟𝑡(𝜎1′′ )
𝑎′1 𝑎′′
𝑎2 (𝑎′1 ) − ′
≥ 𝑎2 (𝑎′′1 ) − 1′
𝜃 𝜃
′′ ′
𝑎 𝑎
𝑎2 (𝑎′′1 ) − ′′1 ≥ 𝑎2 (𝑎′1 ) − ′′1
𝜃 𝜃
′′
Thus, ( 𝜃1′ − 1
𝜃 ′′ )(𝑎1 − 𝑎′1 ) ≥ 0 ⇒ 𝑎′1 ≤ 𝑎′′1
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4.1.4 Separating Equilibrium
∙ Each type picks different action. support of each type’s strategy disjoint
∙ Low type’s action reveales type: equilibrium wage = 𝜃′
∙ By monotonicity, 𝑎′1 = 0. No mixed strategy, else play lower to still get 𝜃′
𝑎′′1
𝜃′ cannot defect: 𝜃′ ≥ 𝜃′′ − ⇒ 𝑎′′1 ≥ 𝜃′ (𝜃′′ − 𝜃′ )
𝜃′
𝜃′′ cannot defect: 𝑎′′1 ≤ 𝜃′′ (𝜃′′ − 𝜃′ )
∙ Suppose pessimistic belief: low type if action is not high, otherwise high
∙ BR: pay low-type wage to “non-high action”, high wage to “high action”
∙ No deviation, hence PBE. Note: Many feasible PBE for each action.
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Definition 10. (𝜎, 𝜇) is a PBE in a two-player multi-stage game with
observed actions and independent types if:
For 2/N players, beliefs satisfy the following conditions for each player 𝑖:
When player 𝑖 deviates, Bayes rule is used to update all players -i,
whenever i’s period-t action has positive probability under period-t beliefs
(i.e. not a surprise). Includes off-the-path, so long as not impossible.
3. No signaling what you don’t know. ∀ℎ𝑡 , 𝑖, 𝑗, 𝑎𝑡 , 𝑎𝑡
Player 𝑖 doesn’t use the play of other players to update beliefs about j,
even if j deviates. k’s action can’t have any information about j’s type.
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4.3 Sequential Equilibrium
Definition 11. An assessment is a pair (𝜋, 𝜇) where 𝜋 is a strategy profile
and 𝜇 is a system of beliefs.
Definition 12. (𝜋, 𝜇) is sequentially rational if the action prescribed by 𝜋𝑖 (ℎ)
is optimal at each information set ℎ for player 𝑖(ℎ), given that opponents play
according to 𝜋−𝑖 and that beliefs over the nodes in ℎ are given by 𝜇.
Definition 13. (𝜋, 𝜇) is consistent if it is the limit of a sequence (𝜋 𝑛 , 𝜇𝑛 )
where each 𝜋 𝑛 is totally mixed and 𝜇𝑛 is derived from 𝜋 𝑛 by Bayes rule.
Definition 14. An assessment (𝜋, 𝜇) is a sequential equilibrium if it is
sequentially rational and consistent
∙ In SE, players with same observations must have same belifs: Beliefs of
all players are derived from the same sequence (𝜋 𝑛 , 𝜇𝑛 )
∙ Addtl SE req: Players have same interpretation of zero-problty events.
∙ 2 & 3’s payoffs independent of each other’s moves. At least one plays R.
∙ Play A is according to Bayes: PBE. But not KW consistent: not SE
∙ But PBE does not imply Sequential Eqm. Additl consistency condition
(PBE does not track different orders of ‘zero problty’. Seq Eqm does.)
∙ Sequential equilibrium implies subgame-perfect equilibrium
∙ Seqential equilibrium ≡ SPE in games of perfect information.
(Because every information set is singleton. Every belief 𝜇 is point mass.)
∙ SE can differ on two extensive forms with same reduced strategic form.
∙ Every finite multistage game with observed actions and independent
types has a SPE. Every game has a SPE
∙ A NE which hits every info set with +ve probability is a sequential eqm.
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Theorem 13. Consider a multi-stage game of incomplete information with
independent types. If either each player has at most two possible types
(#Θ𝑖 ≤ 2 for each 𝑖) or there are two periods, condition on beliefs = condition
on consistency, therefore the sets of PBE and Sequential Equilibria coincide.
∙ B1: all types of player 𝑖 have same beliefs about other players. player 𝑖
believes opponent’s types are independent.
∙ B2: Bayesian update, even off-path. +ve prob at t → +ve prob at 𝑡 + 1
∙ B3: Since player 𝑘 has no private info on 𝑗, even when perturb 𝑘’s strat:
𝑘’s action can’t signal j’s type. 𝑖 doesn’t use 𝑘 to update beliefs on 𝑗.
∙ B4: Players 𝑖 and 𝑗 have same beliefs about 𝑘
𝑃 (𝑐𝑜 ) − 𝑃 (ˆ
𝑐)
Neither player contributed: = 1 − 𝑐𝑜
1 − 𝑃 (ˆ𝑐)
1 − 𝑃 (𝑐𝑜 )
𝑐𝑜 = = 𝑃 𝑟(𝑐 > 𝑐𝑜 ∣𝑐 > 𝑐ˆ)
1 − 𝑃 (ˆ𝑐)
𝑃 (˜
𝑐)
Both players contributed: 1 − 𝑐˜ >
𝑃 (ˆ
𝑐)
𝑐) − 𝑃 (˜
𝑃 (ˆ 𝑐)
𝑐˜ = = 𝑃 𝑟(𝑐 > 𝑐˜∣𝑐 ≤ 𝑐ˆ)
𝑃 (ˆ
𝑐)
We know that type 𝑐ˆ will contribute in period 2 if opponent did not contribute
in period 1 to get utility (1 − 𝑐ˆ)
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𝑃 (˜
𝑐)
𝐸𝑉1 = Expected cont. payoff if contribute: 𝑃 (ˆ
𝑐) ⋅ + [1 − 𝑃 (ˆ
𝑐)] (1−ˆ
𝑐)
|{z} 𝑃 (ˆ
𝑐)
𝑃 𝑟(opp contributes) | {z }
Payoff
Thus, 1 − 𝑐ˆ = 𝑃 (ˆ 𝑐) − 𝑃 (˜
𝑐) + 𝛿(𝑃 (ˆ 𝑐)) = 𝑃 (ˆ
𝑐) + 𝛿 𝑐˜
|{z} 𝑃 (ˆ
𝑐)
𝑃 (ˆ
𝑐)−𝑃 (˜𝑐)
Since 𝑐˜= 𝑃 (ˆ
𝑐)
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4.4.3 For 2 periods left:
𝑎−1
Case 1: −1+𝑎(1−𝑞) < 0 ⇒ 𝑞> ≡ 𝑞 ⇒ Incumbent accommodates
𝑎
Because Incumbent accomodates, normal Entrant plays “In” if 𝜇 < 𝑝
Case 2A: 𝑞 < 𝑞, 𝜇 > 𝑝 Incumbent fights today so normal E stays out tomorrow.
1 𝜇
z }| { z }| {
𝑝(𝐹 ∣𝑇 ) 𝑝(𝑇 )
Normal entrant randomizes if 𝜇(𝑇 ∣𝐹 ) = 𝑝 =
𝑃 (𝐹 )
| {z }
𝑃 (𝑇 )𝑃 (𝑇 𝑓 𝑖𝑔ℎ𝑡𝑠)+𝑃 (𝑆)𝑃 (𝑆𝑓 𝑖𝑔ℎ𝑡𝑠)
𝑏 𝜇 𝜇
= ⇒ 𝛽=
𝑏+1 𝜇 + 𝛽(1 − 𝜇) (1 − 𝜇)𝑏
𝜇 𝑏+1
Total probability of fighting today: 𝜇+(1−𝜇)𝛽 = 𝜇+(1−𝜇) = 𝜇
(1 − 𝜇)𝑏 𝑏
𝑏+1 𝑏 𝑏 2
Soft entrant stays out if 𝑝(𝑓 𝑖𝑔ℎ𝑡) > 𝑝 ⇒ 𝜇> ⇒ 𝜇>( ) = 𝑝2
𝑏 𝑏+1 𝑏+1
If 𝑞 < 𝑞 and 𝜇 ∈ (𝑝2 , 𝑝), soft incumbent has positive equilibrium payoff in 2
period game. Conversely, if 𝜇 < 𝑝2 , normal entrant enters and soft
incumbent’s eqm payoff is 0.
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∙ p(tough) required to deter entry shrinks geometrically with 𝑛
∙ Thus, even small prior 𝑝 can have impact on long games.
∙ Sustain better commitment/ reputation with more types in model.
𝑃 𝑟(𝜃(𝑎)∣ℎ𝑡 )
Bayes: 𝑃 𝑟(𝜃(𝑎)∣(ℎ𝑡 , 𝑎𝑡 )) =
𝑞
Since BR have closed graph (As 𝑞 → 1, player 1 can’t lose a BR), ∃𝑞 < 1 s.t.
every BR for SR players for beliefs 𝑞 > 𝑞 is a BR they are certain LR plays 𝑎
𝑝(𝜃(𝑎)) 𝑙𝑛(𝑝(𝜃(𝑎)))
# of surprises 𝑘 : ≤1 ⇔ 𝑘≤
𝑞𝑘 𝑙𝑛𝑞
LR’s worst payoff from commitment to “always a”: = min(𝑢1 (𝑎1 , 𝛼−1 )∣(𝑎1 , 𝛼−1 ) ∈ 𝑔𝑟𝑎𝑝ℎ(𝐵))
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4.5.1 Example: Game of Perfect Info
Player 1: L1 or R1 which ends games with payoffs (2,2)
Player 2: L2 or R2 which ends games with payoffs (1,0)
Player 1: W1 with payoffs (3,1) or Z1 with payoffs (0,-5)
𝐿2 𝑅2
𝑅1 (2,2) (2,2)
𝑊1 (3,1) (1,0)
𝑍1 (0,−5) (1,0)
5 Problems
5.1 Finding Subgame Perfect Nash Equilibrium (SPNE)
∙ Specify strategies - each player’s actions at each information set.
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