Games with incomplete information.

Players have some private information that other players are not aware of.

This is a little di↵erent from the kind of games we have discussed thus far, where there
was complete information all around.

What are some common examples here?

Players who do not have complete information have some probabilities associated with
di↵erent outcomes. For example, suppose the opponent is of two types (like friend or
enemy, trustworthy or untrustworthy, skilled or unskilled). If ⇥i = {H, L}, P (✓i = H) =
p and P (✓i = L) = 1 − p where p ∈ [0, 1].

What if they do not have any way of associating a probability?

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What are the expected payo↵s?

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Let us define the solution concept needed, i.e., Bayesian Nash Equilibrium or BNE:
A strategy profile s∗1 (✓1 ), s∗2 (✓2 ), , ...s∗n (✓n ),is a BNE if

EUi (s∗i (✓i ), s∗−i (✓−i ; ✓i , ✓−i ) ≥ EUi (si (✓i ), s∗−i (✓−i ; ✓i , ✓−i )

for every si (✓i ) ∈ Si , every ✓i ∈ ⇥i for every player i. Another way to think about this for a
discrete number of types is

� p(✓−i �✓i ) × ui (s∗i (✓i ), s∗−i (✓−i ); ✓i , ✓−i ) ≥ � p(✓−i �✓i ) × ui (si (✓i ), s∗−i (✓−i ); ✓i , ✓−i )
✓−i ∈⇥i ✓−i ∈⇥i

for every si (✓i ) ∈ Si , every ✓i ∈ ⇥i for every player i. How do we interpret p(✓−i �✓i )?

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Let us now try writing the gift exchange game in the normal form:

How do we proceed? Is the value of p relevant?

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