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Dynamic games of
incomplete information
Swapnendu Banerjee
Jadavpur University
Kolkata, INDIA
✘ Relevant solution concept: Perfect Bayesian Equilibrium (PBE).
✘ PBE refines BNE in incomplete information games, the same way SPNE
refines NE in complete information games.
✘ But we temporarily adopt a second perspective:
PBE strengthens the requirements of SPNE by explicitly analyzing
players’ beliefs (as in BNE).
 This perspective arises because, following Harsanyi (1967) we transform
a game of incomplete info to a game of complete but imperfect info.
 Thus an equilibrium concept designed to strengthen BNE in dynamic
games of incomplete information can also strengthen SPNE in dynamic
games of complete but imperfect info.

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Consider the following game:

P1
R
L M
(1,3)
P2
L’ R’
R’ L’

(2,1) (0,2) (0,1)

(0,0)

A1 = {L, M, R} ; A2 = {L’, R’} .

Q: How many sub-games are there?
A: This game has no proper sub-game(s). Therefore, NE and SPNE are the
same. 3
 P2
L’ R’

L 2, 1 0, 0
P1
M 0, 2 0, 1

R 1, 3 1, 3

✘ Above is the normal form of the earlier game.

✘ 2 NE, (L, L’) and (R, R’).
✘ Both are SPNE since there are no proper sub-games of the above game,
the entire game itself is a sub-game.
✘ But note that (R, R’) depends on the non-credible threat that player-2 will
play R’ if she gets to move.
✘ But L’ clearly dominates R’ => Player-1 should not be induced to play R by
2’s threat to play R’. But SPNE fails to refine these two equilibria.
 Requirements
✘ To rule out (R, R’) we need a few requirements:
Requirement 1
✘ At each information set the player with the move must have a belief about
which node in the information set has been reached by the play of the
game.
✘ If the information set is
✗ non-singleton then the belief is a probability distribution over the nodes
in the information set.
✗ singleton, put probability =1 on that node.

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Consider the following game P1
R
L M

p (1-p) (1,3)
P2
L’ R’
R’ L’

(2,1) (0,2) (0,1)

(0,0)

Thus player-2 must have a belief which is a probability distribution at the

non-singleton information set.

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 Requirements
Requirement 2
✘ Given their beliefs the players’ strategies must be sequentially rational. That
is, at each information set the action taken by the player with the move
(and the player’s subsequent strategy) must be optimal given the players’
belief at that information set and other players’ subsequent strategies.
✗ If P2 plays 𝐿’ the expected payoff =1 × 𝑝 + 2 × 1 − p = 2 − p
✗ Plays 𝑅’ then the expected payoff= 0 × 𝑝 + 1 × 1 − 𝑝 = 1 − 𝑝
✗ If P2 is rational, given the belief (common knowledge) he will play 𝐿’
✗ Given that P1 will only play 𝐿.
✘ Thus, imposing the requirements 1 & 2 NE involving 𝑅’ can be ruled out.

✘ Issue: Requirement 1 & 2 doesn’t guarantee

7 rationality of the beliefs.
 Few concepts

✘ On- the- equilibrium path information sets: For a given equilibrium in

a given extensive form game, an information set is on-the-equilibrium
path if it is reached with positive probability if the game is played
according to the equilibrium strategies.

✘ Off- the equilibrium path information sets: For a given equilibrium in

a given extensive form game, an information set is off-the-equilibrium
path If it is certain not to be reached if the game is played according to
the equilibrium strategies.

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 Further Requirements
✘ Requirement 3
At information sets on-the-equilibrium path beliefs are determined by
Bayes Rule and the players’ equilibrium strategies.

Thus on-the-equilibrium path beliefs are to be formed by a scientific process

and that process is the Bayes Rule.

What is Bayes Rule?

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 Further Requirements
A look back at the Bayes Rule

Three equally likely boxes have the following ‘White’ and ‘Red’ balls. A
box is selected at random and then a ball is drawn out of it.
If the ball drawn turns out to be ‘White’ then what is the probability that
it is drawn from the blue box?

4W 3W 2W
3R 7R 3R

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 Bayes rule
✘ Let, W be the observed event that ball drawn is WHITE
✘ R be the event that the Box Red was chosen
✘ B be the event that the Box Blue was chosen
✘ G be the event that the Box Green was chosen
Then that probability is given as 𝑃 𝐵 𝑊 =
𝑃 𝑊 𝐵 𝑃(𝐵)
𝑃 𝑊 𝑅 𝑃 𝑅 +𝑃 𝑊 𝐵 𝑃 𝐵 +𝑃 𝑊 𝐺 𝑃(𝐺)

✘ Prior Belief
1
✗ 𝑃 𝑅 = 𝑃(𝐵)= 𝑃 𝐺 = 3
4 3 2
✗ 𝑃 𝑊 𝑅 = 7 , 𝑃 𝑊 𝐵 = 10 , 𝑃 𝑊 𝐺 =5.
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 Bayes Rule
✘ Posterior Belief
𝑃 𝑊𝐵 𝑃(𝐵) 21 1
𝑃 𝐵𝑊 = = <
𝑃 𝑊𝑅 𝑃 𝑅 +𝑃 𝑊𝐵 𝑃 𝐵 +𝑃 𝑊𝐺 𝑃(𝐺) 89 3

Intuition:
See the proportion of white balls in the Box Blue, therefore the observation
that if the ball drawn is white, then it is least likely that it will come from the
blue box.
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=> Updated belief of the blue box being selected is 89 and it falls compared to
1
the prior belief 3 since the observed event is ‘a white ball is drawn’.
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 Application of Requirement 3
✘ Focus on the (L, L’) equilibrium.

✘ 𝑃 𝐿 𝑝𝑙𝑎𝑦𝑒𝑑 2′ 𝑠 𝑖𝑛𝑓𝑟𝑜𝑚𝑎𝑡𝑖𝑜𝑛 𝑠𝑒𝑡 𝑖𝑠 𝑟𝑒𝑎𝑐ℎ𝑒𝑑 =

𝑃 2′ 𝑠 𝑖𝑛𝑓𝑜 𝑠𝑒𝑡 𝑖𝑠 𝑟𝑒𝑎𝑐ℎ𝑒𝑑 𝐿 𝑃(𝐿)
𝑃 2′ 𝑠 𝑖𝑛𝑓𝑜 𝑠𝑒𝑡 𝑖𝑠 𝑟𝑒𝑎𝑐ℎ𝑒𝑑 𝐿 𝑃(𝐿)+𝑃 2′ 𝑠 𝑖𝑛𝑓𝑜 𝑠𝑒𝑡 𝑖𝑠 𝑟𝑒𝑎𝑐ℎ𝑒𝑑 𝑀 𝑃(𝑀))
1. 𝑝
= =1
1. 𝑝 + 0. 1 − 𝑝
Thus, prior belief was “p”, updated belief is ‘1’, with the help of Bayes’ rule
and players equilibrium strategies.

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 Further Requirements
Requirement 4
✘ At information sets off-the-equilibrium path, beliefs are determined by
Bayes Rule and the players’ equilibrium strategies where possible.
Example: A
P1 (2,0,0)
P3
D
P2 𝐿’ 𝑅’
L R L 2,1 3,3**
P2
(p) P3 (1-p)
R 1,2 1,1
𝐿’ 𝑅’ 𝐿’ 𝑅’

(1,2,1) (0,1,1)
(3,3,3) (0,1,2)
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✘ In the sub-game, P2 should play L and P3 should play 𝑅’
✘ Given that P1 should play D
✘ Unique SPNE (𝐷, 𝐿, 𝑅’), p=1
✘ Since, there is only one NE in the sub-game , SPNE of the entire game is
unique
✘ Now consider (𝐴, 𝐿, 𝐿’) with belief p=0
✘ If the information set of P3 is reached, lets examine P3’s actions:
✗ expected payoff from 𝐿’ =1 × 𝑝 + 2 × 1 − 𝑝 = 2 − p
✗ expected payoff from 𝑅’ =3 × 𝑝 + 1 × 1 − 𝑝 = 2p + 1
1
✘ P3 will play 𝐿’ iff 2 − p > 2p + 1 => p < 3
1
✘ As p = 0 < 3, 𝐿’ is optimum for P3, given that P2 will play L and P1 will play
A.
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✘ If (𝐷, 𝐿, 𝑅’) is the unique SPNE then how do we rule out (𝐴, 𝐿, 𝐿’) as an
equilibrium??
✘ In this case if P1 plays A, then information set of P3 is not reached , i.e., it is
off-the-equilibrium path
✘ According to requirement 4 belief should be pinned down by Bayes’ Rule
and the players’ equilibrium strategies.
✘ If (𝐴, 𝐿, 𝐿’) is the equilibrium we are considering then P2 plays L and
therefore p=0 is an inconsistent belief for P3.
✘ According to Req 4, p=1, if L is played by P2 the P3 will play 𝑅’, not L’.
✘ Therefore, (A, L, L’ with p=0) is ruled out.
✘ PBE: A perfect Bayesian Equilibrium consists of strategies and beliefs
satisfying requirement 1 through 4.
✘ Reference: Gibbons, Ch 4, Section 4.1 (P 175-183).
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