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2
), and (t
1
, t
2
) with equal probabilities
1/3.
t
2
t
2
t
1
1/3 1/3
t
1
1/3 0
Note that nature never selects (t
1
, t
2
).
Player 1 learns whether nature has selected t
1
or t
1
; player 2 learns
whether nature has selected t
2
or t
2
.
Players 1 and 2 simultaneously choose their actions: player 1 chooses
either T or B, and player 2 chooses either L or R. Payos are given by
the following game:
L R
T 4, 4 2, 5
B 5, 2 0, 0
Note that natures choice does not aect payos directly.
All of this is common knowledge.
1. (5 marks) Give either a normal-form or agent-normal-form representa-
tion of this game.
2. (5 marks) Find all pure-strategy Bayesian Nash equilibria.
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EC3312
II. Consider a rst-price, sealed-bid auction with two bidders: bidders submit
their bids simultaneously, and the bidder with the highest bid gets the object
and pays his own bid. Bidder 1s valuation v
1
is uniformly distributed on
[0, 1], with density
f
1
(v
1
) =
{
0 if v
1
< 0 or v
1
> 1,
1 if 0 v
1
1,
and cumulative distribution
F
1
(x) = Prob(v
1
x) =
0 if x < 0,
x if 0 x 1,
1 if x > 1,
and bidder 2s valuation v
2
is distributed on [0, 1] with density
f
2
(v
2
) =
{
0 if v
2
< 0 or v
2
> 1,
2v
2
if 0 v
2
1,
and cumulative distribution
F
2
(x) = Prob(v
2
x) =
0 if x < 0,
x
2
if 0 x 1,
1 if x > 1.
We assume that v
1
and v
2
are stochastically independent.
1. (5 marks) Suppose that each bidder i follows a linear strategy
b
i
(v
i
) = a
i
+ c
i
v
i
with a
i
0 and c
i
> 0. Conditional on that bidder is valuation is v
i
,
compute bidder is expected payo when he submits bid b
i
and player
j follows b
j
(v
j
) = a
j
+ c
j
v
j
.
2. (5 marks) Find an asymmetric (!) Bayesian Nash equilibrium of this
auction.
3. (5 marks) Compare rst- and second-price auctions. Which auction
format allocates the good more eciently in equilibrium?
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EC3312
III. Consider the innite repetition of prisoners dilemma
Dont Confess (D) Confess (C)
Dont Confess (D) 4, 4 0, 5
Confess (C) 5, 0 1, 1
with discount factor (0, 1).
1. (5 marks) We dene the trigger strategy as follows:
In period 1, play D.
In period t 2, if outcomes of all t 1 preceding periods are
(D, D), play D; otherwise (i.e., if some player played C at least
once before), play C.
Find the condition on under which the pair of trigger strategies is a
subgame-perfect Nash equilibrium.
2. (5 marks) We dene the tit-for-tat strategy as follows:
In period 1, play D.
In period t 2, if the opponent played D in the previous period
(i.e., the (t1)-th period), play D; otherwise (i.e., if the opponent
played C in the previous period), play C.
Find the condition on under which the pair of tit-for-tat strategies is
a subgame-perfect Nash equilibrium.
4
EC3312
IV. Consider a Bertrand duopoly with dierentiated products. Demand for
rm i is
q
i
(p
i
, p
j
) = 1 p
i
+ p
j
.
Costs are zero for both rms. The game proceeds as follows:
In period 1, rm 1 chooses price p
1
. We assume that rm 1 is committed
to this plan thereafter.
In period 2, rm 2 sends an industrial spy to rm 1. Espionage succeeds
with probability , in which case rm 2 observes rm 1s planned price
p
1
and chooses p
2
= p
2,s
(p
1
). With the remaining probability 1 ,
espionage fails, in which case rm 2 chooses p
2
= p
2,f
without observing
p
1
.
In period 3, both markets open, and demands are realized.
1. (10 marks) Find all pure-strategy perfect Bayesian equilibria in this
game.
2. (5 marks) Compare equilibrium payos for various values of . Does
rm 1 prefer larger or smaller ? Does rm 2 prefer larger or smaller
? Explain economic intuitions.
END OF PAPER
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