U NIVERSIT E C ATHOLIQUE DE L OUVAIN LECON2011 I NTERDEPENDENCIES AND S TRATEGIC B EHAVIOR , 2010 - 11 P ROBLEM S ET 4: S IMULTANEOUS - MOVE G AMES WITH I NCOMPLETE

E I NFORMATION

E XERCISE 1. Consider the following version of the Battle of Sexes game, where a man and a woman simultaneously choose whether to go to football or to the opera. Suppose that each person in the couple can be in love, or not in love. The probability that they are both in love is 0.1, the probability that they are both not in love is 0.1, the probability that she is in love and he is not is 0.4, the same as the probability that he is in love and she is not. The payoffs are as follows: For the woman: If she is in love, her payoff is 3 if she is at the opera with him; 2 if she is at football with him; and 0 if she is without him (wherever she is). If she is not in love, her payoff is 3 if she is at the opera (with or without him); 0 if she is at football without him; and -1 if she is at football with him. For the man: If he is in love, his payoff is 3 if he is at football with her; 2 if he is at the opera with her; and 0 if he is without her (wherever he is). If he is not in love, his payoff is 3 if he is at football (with or without her); 0 if he is at the opera without her; and -1 if he is at the opera with her. Determine whether the following pair of strategies is a Bayes-Nash equilibrium: if she is in love she goes to football, and if she is not in love she goes to opera; while if he is in love he goes to opera, and if he is not in love he goes to football E XERCISE 2. Consider two rms that compete in the market of some given product. Suppose that q > 0 units of the product are sold, regardless of the price. If the rms charge different prices, all consumers buy from the rm with the lowest price. If they charge the same price, the market is split equally between the rms. Solve: 1. Suppose rst that both rms can produce the good at a xed cost of c per unit, which is known to both rms. Express the prots of the rms as a function of their prices, and nd a Nash equilibrium in pure strategies. How much are the equilibrium payoffs of the rms? If the rms were to cooperate, how much would their prots be? So, why do they not cooperate? 2. Now, suppose that the cost of producing each unit can be cL or cH , with cL < cH . Each rm knows its own production cost but does not know the cost of its competitor and assumes that it can be cL or cH with equal probability. Express the expected prots of the rms as a function of their prices. Is there Bayes-Nash equilibrium in which each rm charges as price its own production cost? E XERCISE 3. Consider a private-value auction in which two bidders, i = 1, 2, participate. Suppose that bidders valuations (v 1 and v 2 ) are i.i.d. realizations of a random variable that takes values 1 and 3 with equal probability. Suppose that in the auction only three bids are possible: bi {1, 2, 3}. 1. In the case of a second-price auction, nd a symmetric Bayes-Nash equilibrium. Whats the expected revenue of the seller in this case? 2. In the case of a rst-price auction, show that both bidders following the strategy (1 1, 3 2) constitutes a Bayes-Nash equilibrium. Whats the expected revenue of the seller in this equilibrium? 3. Does the conclusion of the revenue equivalence theorem hold in this case. Should it?