Find A WSE In The Following Dynamic Game Of Incomplete Infor ✓ Solved

Find a WSE in the following dynamic game of incomplete information.

PSC/ECO 288 Game Theory Prof. Tasos Kalandrakis Spring 2015 Assignment #8: Please write clearly and make sure to justify all your answers.

1. Find a WSE in the following dynamic game of incomplete information.

a) Report a behavioral strategy for players moving at h1, h2, h3, and I1.

b) Derive and report equilibrium beliefs µ(h4), µ(h5), µ(h6) for player 2 at I1.

c) Verify that sequential rationality is satisfied at all information sets h1, h2, h3 and I1.

Paper For Above Instructions

Game theory is a mathematical framework used for analyzing situations in which players make decisions that are interdependent. This essay aims to find a Weak Sequential Equilibrium (WSE) in a dynamic game of incomplete information as presented in the assignment. The analysis has three parts: behavioral strategies for the players, equilibrium beliefs for player 2, and the verification of sequential rationality.

Part A: Behavioral Strategies

In the context of dynamic games, behavioral strategies represent the plans of action that players follow based on their beliefs about the other players' types. In this particular case, we need to examine players at information sets h1, h2, h3, and I1.

Assume player 1 has the options L or R, and player 2 can choose U or D based on the moves of player 1 and their private information. A behavioral strategy is given by a probability distribution over the actions available to a player at the information set they face. Let us denote:

  • Behavioral strategy for player at h1: p1 = P(L|h1) and (1-p1) = P(R|h1)
  • For player at h2: p2 = P(U|h2) and (1-p2) = P(D|h2)
  • For player at h3: p3 = P(U|h3) and (1-p3) = P(D|h3)
  • For player at I1: p4 = P(L|I1) and (1-p4) = P(R|I1)

These probabilities will dictate the strategies chosen by players, allowing them to make decisions that maximize their expected payoffs based on their beliefs about other players' actions.

Part B: Equilibrium Beliefs

Equilibrium beliefs refer to the beliefs players hold about the types of other players at a given information set. In our case, we are interested in the equilibrium beliefs of player 2 at information set I1: µ(h4), µ(h5), and µ(h6).

Let us denote:

  • µ(h4) = probability that player 2 believes player 1 chose L, given that the information set is I1
  • µ(h5) = probability that player 2 believes player 1 chose R, given that the information set is I1
  • µ(h6) = probability distribution reflecting player 2's beliefs about player 1's action that is consistent with the Bayesian equilibrium. We will derive these using Bayes' rule based on the conditional probabilities from the game's structure.

Player 2 will evaluate what player 1 could have chosen based on their observed actions and maximize their expected utility accordingly, leading to beliefs bound by the conditions of the game.

Part C: Sequential Rationality Verification

Sequential rationality is a fundamental concept in game theory ensuring that players play optimally given their beliefs at every possible information set. To verify sequential rationality at information sets h1, h2, h3, and I1, we need to examine the strategies chosen by each player and whether they are optimal given the beliefs formed in part B.

1. At h1, if player 1 chooses L, the corresponding optimal response for player 2 must yield a better outcome than the alternatives, given the beliefs µ(h4) and µ(h5).

2. At h2 and h3, player 2 will assess the expected utility of U and D and select the action maximizing that expectation based on their belief. We need to compute the payoffs based on the matrix given in the problem, ensuring that the expected utility derived by player 2 is higher when playing against player 1's behavioral strategies.

3. Finally, at I1, player 1 must choose between L and R, whereas player 2's responses depend on the beliefs based on previous decisions, confirming that their strategies align with their beliefs about player 1's actions.

In conclusion, we can derive the WSE through establishing behavioral strategies for each player, calculating equilibrium beliefs, and confirming sequential rationality across all sets in the dynamic game of incomplete information. The successful application of these concepts not only demonstrates the theoretical framework of game theory but also allows us to verify the integrity of interactions within the game.

References

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