Professional Documents
Culture Documents
14.12 Game Theory Lecture Notes Lectures 15-18: 1 Cournot With Incomplete Information
14.12 Game Theory Lecture Notes Lectures 15-18: 1 Cournot With Incomplete Information
14.12 Game Theory Lecture Notes Lectures 15-18: 1 Cournot With Incomplete Information
P (Q) = a Q
where Q = q1 + q2 .
The marginal cost of Firm 1 = c1 ; common knowledge.
Firm 2s marginal cost:
cH
with probaility ,
cL
with probaility 1 ,
Suppose firm 2 is type high. Then, given the quantity q1 chosen by player, its problem is
max(P cH )q2 = [a q1 q2 cH ] q2 .
q2
Hence,
q2 (cH ) =
a q1 cH
2
(*)
max [a q1 q2 cH ] q2 ,
q2
hence
a q1 cH
.
2
Important Remark: The same level of q1 in both cases. Why??
q2 (cL ) =
(**)
Firm 1s problem:
max [a q1 q2 (cH ) c] q1 + (1 ) [a q1 q2 (cL ) c] q1
q1
[a q2 (cH ) c] + (1 ) [a q2 (cL ) c]
2
q2 (cH ) =
(***)
a 2cH + c (1 )(cH cL )
+
3
6
q2 (cL ) =
q1 =
a 2cL + c (cH cL )
+
3
6
a 2c + cH + (1 )cL
3
if bi = bj
0 if bi < bj
1
max(vi bi )P rob{bi > bj (vj )|given beliefs of player i) + (vi bi )P rob{bi = bj (vj )|...)
bi
2
Let us first conjecture the form of the equilibrium: Conjecture:
equilibrium
2
b = a + cv.
Then, 12 (vi bi )P rob{bi = bj (vj )|...) = 0. Hence,
(vi bi )P rob{vj
bi a
(bi a)
} = (vi bi )
c
c
FOC:
vi + a
if vi a
2
=a
if vi < a
bi =
(1)
trade at price p =
Pb +Ps
2 .
Pb + Ps (Vs )
: Pb Ps (Vs ) =
maxE Vb
Pb
2
where E[Ps (Vs )|Pb Ps (Vs )] is the expected seller bid conditional on Pb being greater than
Ps (Vs ).
Ps + Pb (Vb )
Vs : Pb (Vb ) Ps ] =
Ps
2
Equilibrium is where Ps (Vj ) is a best response to Pb (Vb ) while Pb (Vb ) is a best response to
Ps (Vs ).
There are many Bayesian Nash Equilibria. Here is one.
Ps = X
if
Pb = X
if
Vs X
Vb X.
Vb
Vb /Vs
Trade
Efficient
not to trade
0
Inefficient
lack of equilibrium
VS
Likewise, ps pb (vb ) = ab + cb vb i
vs
pb as
.
cs
vb
ps ab
.
cb
pb + ps (vs )
: pb ps (vs )
maxE vb
pb
2
Z pb as
cs
pb + ps (vs )
= max
vb
dvs
pb
2
0
Z pb as
cs
pb + as + cs vs
dvs
= max
vb
pb
2
0
Z pb as
cs
cs
pb as
pb + as
vb
= max
vs dvs
pb
cs
2
2 0
cs pb as 2
pb as
pb + as
vb
= max
pb
cs
2
4
cs
pb as
pb + as pb as
vb
= max
pb
cs
2
4
pb as
3pb + as
= max
.
vb
pb
cs
4
F.O.C.:
1
cs
3(pb as )
3pb + as
vb
=0
4
4cs
i.e.,
2
1
pb = vb + as .
3
3
Similarly, the sellers problem is
1
There is somewhat simpler way in to get the same outcome; see Gibbons.
(2)
Z 1
ps + ab + cb vb
ps + pb (vb )
vs : pb (vb ) ps = max p a
vs dvb
maxE
s
ps
ps
b
2
2
cb
Z
ps + ab
ps ab
cb 1
vs +
= max 1
vb dvb
ps
cb
2
2 ps ab
cb
ps ab
ps + ab
cb
ps ab 2
vs +
= max 1
1
ps
cb
2
4
cb
ps + ab
cb ps ab
ps ab
= max 1
vs + +
ps
cb
2
4
4
ps ab
3ps + ab
cb
= max 1
vs +
ps
cb
4
4
F.O.C.
1 3ps + ab
3
ps ab
1
vs +
+
1
=0
cb
4
4
4
cb
i.e.,
3
cb
3ps + ab
vs +
+ (cb (ps ab )) = 0,
4
4
4
i.e.,
ab
3ps
cb 3
ab + cb
= + vs + (cb + ab ) = vs +
2
4
4
4
2
i.e.,
2
ab + cb
.
ps = vs +
3
3
By (2), ab = as /3, and by (3), as =
ab
3
(3)
2
1
vb +
3
12
2
1
vs + .
3
4
(4)
(5)