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Sequential Move Game Dynamics

The document discusses various game theory concepts, including sequential move games, signaling games, and issues related to asymmetric information such as adverse selection and moral hazard. It highlights the implications of hidden actions in contracts and presents solutions like warranties and product differentiation to address agency problems. Additionally, it mentions the Bertrand Trap and its impact on economic profits, emphasizing the importance of strategic decision-making in competitive environments.

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shanthini
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16 views2 pages

Sequential Move Game Dynamics

The document discusses various game theory concepts, including sequential move games, signaling games, and issues related to asymmetric information such as adverse selection and moral hazard. It highlights the implications of hidden actions in contracts and presents solutions like warranties and product differentiation to address agency problems. Additionally, it mentions the Bertrand Trap and its impact on economic profits, emphasizing the importance of strategic decision-making in competitive environments.

Uploaded by

shanthini
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Sequential move game:

- One player chooses their action before the other. The latter player knows what the
first player chose.
- Ex. Stackelberg game – sequential quantity game

Signalling game

Information Set: An information set of a player I is the collection of decision nodes among
which a player cannot distinguish his/her position. If 2 nodes are in the same information
set, then the available actions at those nodes must be exactly the same. We also assume
perfect recall – that the player can remember everything they’ve done in the past.

Contracts: A game with hidden actions gives rise to the agency problem. Because the
principal cannot observe the agent’s actions, there is room for the agent to cheat the
contract if the contract has not been strategically designed to eliminate that room.

Asymmetric Information
- Lemons
- Agency
- Signalling

Bertrand Trap
- Nash equilibrium is c. Economic profits are 0. Accounting profits could be negative if
there are sunk costs. Neither higher demand nor lower costs will increase profits, if
both firms have the same costs.

Solutions
- Become the cost leader
- Product differentiation and branding moderates impact of price competition

Capacity Game

Adverse Selection: One party knows more information than another. The general result is
that there is a tendency for the low quality product to flood the market, resulting in an
illiquid market.

Solutions: Provide warranty, reputation, third-party verification

Moral Hazard: One party has the incentive to take risks without taking the responsibility for
the risk

Reaction curve:

Sequential Move Game

Signalling Game
- One person’s actions influences the other’s belief. Action informed player takes
conveys information to less informed player about the unobservable type of the
more informaed player
- When the informed player moves first, she must think about the information
conveyed by her actions to the uninformed player

When the contractor cannot observe the latter’s action

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