Prof. Dr.
Stefan Bühler
University of St. Gallen
Institute of Economics (FGN-HSG)
Varnbüelstrasse 19
CH-9000 St. Gallen
Advanced Microeconomics III:
Game Theory
Spring Term 2019
Problem Set 1
Teaching assistant:
Hyacinthe Müller
Office hours: Room 34-307, by appointment
Phone: + 41 71 224 32 11
Email: [Link]@[Link]
Advanced Microeconomics III, Spring Term 2019 Prof. Dr. Stefan Bühler
Problem 1: Nash Equilibria
Consider the following game:
Player 2
a b c
A 0, 0 0, 0 5, 10
Player 1 B 0, 0 4, 4 0, 0
C 10, 5 0, 0 0, 0
b. Find the mixed-strategy Nash equilibrium in which all pure strategies are played with
strictly positive probability.
c. Assume that only A, C, a, and c are played with positive probability. Find the mixed-
strategy Nash equilibrium.
From now on, consider the following game and suppose that R.
Player 2
L R
U 1, 1 0, 0
Player 1
D 0, 0 ,1−
d. Find the value(s) of for which the number of Nash equilibria is maximised?
e. For which value(s) of does this game have a unique Nash equilibrium?
Problem 2: Bank Runs
A bank has invested in a long-term project. The bank has two clients who have deposited
an amount D each at time t0. Allowing the investment to reach maturity, the project yields
2R, where R > D. Withdrawals are possible either before or after the maturity of the
investment project. However, the bank has only limited liquidity. If it is forced to liquidate
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Advanced Microeconomics III, Spring Term 2019 Prof. Dr. Stefan Bühler
D
its investments before maturity, then only 2r can be recovered, where r ( 2 , D). If both
investors do make withdrawals in t1 (before maturity), each receives r and the game ends. If
only one investor makes a withdrawal in t1, he receives D, the other receives 2r − D, and the
game ends. If neither investor makes a withdrawal in t1, the project matures. In t2 (after
maturity), if both make a withdrawal, they each receive R and the game ends. If only one
makes a withdrawal, then he receives 2R − D, while the other receives D, and the game ends.
If neither makes a withdrawal in t2, each investor receives R and the game ends. Assume
that the discount factor is equal to one.
a. Represent this game as a normal-form game.
b. Find all pure-strategy Nash equilibria.
c. Find the subgame-perfect Nash equilibria.
d. What are the differences between this game and the standard Prisoner’s Dilemma from
lecture 0? Explain briefly and be as precise as possible. Your answer should not exceed
a third of a page.
Problem 3: Collusion between Cournot Oligopolists
Two firms compete in a market over an infinite time horizon, that is, T → ∞. The inverse
market demand in each period t T is P = 10 − Q,12 where Q denotes total supply and P the
market price. Assume that each firm faces constant marginal cost of production equal to
one. Fixed costs are assumed to be zero. The firms decide to form a cartel and to equally
share the resulting market. If either firm deviates from the agreement, both firms return to
the non-cooperative Cournot Nash equilibrium forever. Assume that the discount factor of
all firms is , where 0 < < 1.
a. For which is the monopoly outcome a subgame-perfect equilibrium (SPE) that can be
be sustained by the cartel?
b. Still assuming that the cartel output is equally shared among the participants, what
happens if the number of participating firms increases? For three firms, which values of
ensure stability of the cartel?
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Advanced Microeconomics III, Spring Term 2019 Prof. Dr. Stefan Bühler
c. How does the result from part a. change in terms of if marginal costs are assumed to
be zero?
d. Characterise the SPE if the time horizon is finite.