How to find BNE of the exchange game?
How to find BNE of the exchange game?
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Hãru2you · External communityPost link
External question — Economics Stack Exchange
Author: Hãru2you
Original post: https://economics.stackexchange.com/questions/57862
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
Each of two players receives a ticket t on which there is a
number in [0,1].
The number on a players ticket is the size of a prize that he may
receive.
The two prizes are identically and independently distributed
according to a uniform distribution.
Each player is asked independently and simultaneously whether
he wants to exchange his price for the other players prize.
If both players agree than the prizes are exchanges; otherwise
each player receives his own prize.
I did it till best response of player 2 given player 1 is playing 'Exchange when T1<k' will be:
Don't exchange, if T2>k
Exchange if , T2<k
But it turns out to be T2<k/2 in second part. Why is it so?
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tdm · External communityPost link
External answer — Economics Stack Exchange
Author: tdm
Original post: https://economics.stackexchange.com/a/57863
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
Assume that the decision rule (in equilibrium) for player 1 is to ask for an exchange iff
$T_1 \le k_1$
.
Now assume that player 1 does indeed ask for an exchange. Then in equilibrium, player 2 knows that
$T_1 \le k_1$
. Given that the prior of
$T_1$
is the uniform distribution over
$[0,1]$
the posterior of
$T_1$
for player 2 will now be the uniform over
$[0,k_1]$
.
This means that, if she agrees to exchange, then the expected payoff for player 2 equals
$\frac{k_1}{2}$
. As such, Player 2 will agree with the exchange if and only if
$T_2 \le \frac{k_1}{2}$
as
$\frac{k_2}{2}$
is the expected value of a uniformly distributed random variable over
$[0,k_1]$
.
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