Behavioral perfect equilibrium in Bayesian games

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

We develop the notion of perfect Bayesian Nash Equilibrium-perfect BNE-in general Bayesian games. We test perfect BNE against the criteria laid out by Kohlberg and Mertens (1986). We show that, for a focal class of Bayesian games, perfect BNE exists. Moreover, when payoffs are continuous, perfect BNE is limit undominated for almost every type.

We illustrate the use of perfect BNE in the context of a second-price auction with interdependent values. Perfect BNE selects the unique pure strategy equilibrium in continuous strategies that separates types. Moreover, when valuations become independent, the equilibrium converges to the classical truthful dominant strategy equilibrium. We also show that less intuitive equilibria in which types are pooled are ruled out by our selection criterion. We further argue that standard selection criteria for second-price auctions have no bite here. Bidders have no dominant strategies, and the separating equilibrium is not sincere. (C) 2016 Elsevier Inc. All rights reserved.

Original languageEnglish
Pages (from-to)78-109
Number of pages32
JournalGames and Economic Behavior
Volume98
DOIs
Publication statusPublished - Jul 2016

Keywords

  • Trembling hand perfect equilibrium
  • Bayesian game with infinite type spaces
  • Behavior strategy
  • Second-price auction with incomplete information
  • CHAIN STORE PARADOX
  • INCOMPLETE INFORMATION
  • DISCONTINUOUS GAMES
  • STABLE EQUILIBRIA
  • DEFINITION
  • EXISTENCE
  • REFORMULATION
  • STABILITY
  • PURE

Cite this

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title = "Behavioral perfect equilibrium in Bayesian games",
abstract = "We develop the notion of perfect Bayesian Nash Equilibrium-perfect BNE-in general Bayesian games. We test perfect BNE against the criteria laid out by Kohlberg and Mertens (1986). We show that, for a focal class of Bayesian games, perfect BNE exists. Moreover, when payoffs are continuous, perfect BNE is limit undominated for almost every type.We illustrate the use of perfect BNE in the context of a second-price auction with interdependent values. Perfect BNE selects the unique pure strategy equilibrium in continuous strategies that separates types. Moreover, when valuations become independent, the equilibrium converges to the classical truthful dominant strategy equilibrium. We also show that less intuitive equilibria in which types are pooled are ruled out by our selection criterion. We further argue that standard selection criteria for second-price auctions have no bite here. Bidders have no dominant strategies, and the separating equilibrium is not sincere. (C) 2016 Elsevier Inc. All rights reserved.",
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author = "Elnaz Bajoori and Janos Flesch and Dries Vermeulen",
note = "No data used",
year = "2016",
month = "7",
doi = "10.1016/j.geb.2016.06.002",
language = "English",
volume = "98",
pages = "78--109",
journal = "Games and Economic Behavior",
issn = "0899-8256",
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}

Behavioral perfect equilibrium in Bayesian games. / Bajoori, Elnaz; Flesch, Janos; Vermeulen, Dries.

In: Games and Economic Behavior, Vol. 98, 07.2016, p. 78-109.

Research output: Contribution to journalArticleAcademicpeer-review

TY - JOUR

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AU - Bajoori, Elnaz

AU - Flesch, Janos

AU - Vermeulen, Dries

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N2 - We develop the notion of perfect Bayesian Nash Equilibrium-perfect BNE-in general Bayesian games. We test perfect BNE against the criteria laid out by Kohlberg and Mertens (1986). We show that, for a focal class of Bayesian games, perfect BNE exists. Moreover, when payoffs are continuous, perfect BNE is limit undominated for almost every type.We illustrate the use of perfect BNE in the context of a second-price auction with interdependent values. Perfect BNE selects the unique pure strategy equilibrium in continuous strategies that separates types. Moreover, when valuations become independent, the equilibrium converges to the classical truthful dominant strategy equilibrium. We also show that less intuitive equilibria in which types are pooled are ruled out by our selection criterion. We further argue that standard selection criteria for second-price auctions have no bite here. Bidders have no dominant strategies, and the separating equilibrium is not sincere. (C) 2016 Elsevier Inc. All rights reserved.

AB - We develop the notion of perfect Bayesian Nash Equilibrium-perfect BNE-in general Bayesian games. We test perfect BNE against the criteria laid out by Kohlberg and Mertens (1986). We show that, for a focal class of Bayesian games, perfect BNE exists. Moreover, when payoffs are continuous, perfect BNE is limit undominated for almost every type.We illustrate the use of perfect BNE in the context of a second-price auction with interdependent values. Perfect BNE selects the unique pure strategy equilibrium in continuous strategies that separates types. Moreover, when valuations become independent, the equilibrium converges to the classical truthful dominant strategy equilibrium. We also show that less intuitive equilibria in which types are pooled are ruled out by our selection criterion. We further argue that standard selection criteria for second-price auctions have no bite here. Bidders have no dominant strategies, and the separating equilibrium is not sincere. (C) 2016 Elsevier Inc. All rights reserved.

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KW - Behavior strategy

KW - Second-price auction with incomplete information

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KW - STABLE EQUILIBRIA

KW - DEFINITION

KW - EXISTENCE

KW - REFORMULATION

KW - STABILITY

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