nep-gth New Economics Papers
on Game Theory
Issue of 2005‒01‒16
nineteen papers chosen by
Gerald Pech
NUI Galway

  1. An Almost Ideal Sharing Scheme for Coalition Games with Externalities By Johan Eyckmans; Michael Finus
  2. Choosing Opponents in Games of Cooperation and Coordination By Engseld, Peter; Bergh, Andreas
  3. Minority Game - Experiments and Simulations of Traffic Scenarios By Thorsten Chmura; Thomas Pitz
  4. An Extended Reinforcement Algorithm for Estimation of Human Behaviour in Congestion Games By Thorsten Chmura; Thomas Pitz
  5. The Impact of Resale on 2-Bidder First-Price Auctions where One Bidder's Value is Commonly Known By Thomas Tröger
  6. Envy Freeness in Experimental Fair Division Problems By Dorothea K. Herreiner; Clemens Puppe
  7. Equitable Allocations in Experimental Bargaining Games: Inequality Aversion versus Efficiency By Dorothea K. Herreiner; Clemens Puppe
  8. Why People Reject Advantageous Offers – Non-monotone Strategies in Ultimatum Bargaining By Heike Hennig-Schmidt; Zhu-Yu Li; Chaoliang Yang
  9. Comparing Open and Sealed Bid Auctions: Theory and Evidence from Timber Auctions By Jonathan Levin; Susan Athey; Enrique Seira
  10. Bidding for Incompete Contracts By Patrick Bajari; Stephanie Houghton; Steven Tadelis
  11. Cournot Competition and Endogenous Firm Size By Jason Barr; Francesco Saraceno
  12. How to Win Twice at an Auction. On the Incidence of Commissions in Auction Markets By Victor Ginsburgh; Patrick Legros; Nicolas Sahuguet
  13. Sequential vs. Single-Round Uniform-Price Auctions By Claudio Mezzetti; Aleksandar Pekec; Ilia Tsetlin
  14. Equilibrium in Scoring Auctions By John Asker; Estelle Cantillon
  15. Nonparametric Tests for Common Values in First-Price Sealed-Bid Auctions By Philip A. Haile; Han Hong; Matthew Shum
  16. Inflation Targets as Focal Points By Maria Demertzis; Nicola Viegi
  17. Order Flow and the Formation of Dealer Bids: An Analysis of Information and Strategic Behavior in the Government of Canada Securities Auctions By Samita Sareen; Ali Hortacsu
  18. Multidimensional Mechanism Design: Revenue Maximization and the Multiple-Good Monopoly By Alejandro M. Manelli; Daniel R. Vincent
  19. Agent based computational model of trust By Gorobets, A.; Nooteboom, B.

  1. By: Johan Eyckmans (Europese Hogeschool Brussel EHSAL and Katholieke Universiteit Leuven); Michael Finus (University of Hagen)
    Abstract: We propose a class of sharing schemes for the distribution of the gains from cooperation for coalition games with externalities. In the context of the partition function, it is shown that any member of this class of sharing schemes leads to the same set of stable coalitions in the sense of d’Aspremont et al. (1983). These schemes are “almost ideal” in that they stabilize these coalitions which generate the highest global welfare among the set of “potentially stable coalitions”. Our sharing scheme is particularly powerful for economic problems that are characterized by positive externalities from coalition formation and which therefore are likely to suffer from severe free-riding.
    Keywords: Coalition games, Partition function, Externalities, Sharing schemes
    JEL: C70 C71
    Date: 2004–12
  2. By: Engseld, Peter (Department of Economics, Lund University); Bergh, Andreas (Department of Economics, Lund University)
    Abstract: We analyze a cooperation game and a coordination game in an evolutionary environment. Agents make noisy observations of opponent's propensity to play dove, called reputation, and form preferences over opponents based on their reputation. A game takes place when two agents agree to play. Socially optimal cooperation is evolutionary stable when reputation perfectly reflects propensity to cooperate. With some reputation noise, there will be at least some cooperation. If reputation is noisy enough, there is no cooperation in equilibrium. In the coordination game, the efficient equilibrium is chosen and agents with better skills to observe reputation earn more
    Keywords: Cooperation; Coordination; Prisoners Dilemma; Signaling; Reputation; Evolutionary Games; Evolutionary Equilibrium
    JEL: C70 C72
    Date: 2005–01–04
  3. By: Thorsten Chmura; Thomas Pitz
    Abstract: This paper reports laboratory experiments and simulations on a minority game. The minority game is the most important example for a classic non-zerosum- game. The game can be applied on different situations with social and economic contests. We chose an elementary traffic scenario, in which subjects had to choose between a road A and a road B. Nine subjects participated in each session. Subjects played 100 rounds and had to choose between one of the roads. The road which the minority of players chose got positive payoffs. We constructed an extended reinforcement model which fits the empirical data.
    Date: 2004–12
  4. By: Thorsten Chmura; Thomas Pitz
    Abstract: The paper reports simulations applied on two similar congestion games: the first is the classical minority game. The second one is a asymmetric variation of the minority game with linear payoff functions. For each game simulation results based on an extended reinforcement algorithm are compared with real experimental statistics. It is shown that the extension of the reinforcement model is essential for fitting the experimental data and estimating the players behaviour.
    Keywords: congestion game, minority game, laboratory experiments, reinforcement algorithm, payoff sum model
    JEL: C91 C92 C15 R4
    Date: 2004–12
  5. By: Thomas Tröger
    Abstract: We consider 2-bidder first-price auctions where one bidder's value is commonly known. Such auctions induce an ineffcient allocation. We show that a resale opportunity, where the auction winner can make a take-it-or-leave-it offer to the loser, increases (reduces) the ineffciency of the market when the buyer with the commonly known value is weak (strong). Resale always reduces all bidders' payoffs and increases the initial seller's revenue.
    Keywords: asymmetric first-price auctions, resale, effciency
    JEL: D44
    Date: 2004–09
  6. By: Dorothea K. Herreiner; Clemens Puppe
    Abstract: In the recent experimental literature several social preference models have been suggested that address observed behavior not reducible to the pursuit of self-interest. Inequality aversion is one such model where preferences are distributional. Frequently, envy is suggested as the underlying rationale for inequality aversion. Envy is a central criterion in the theoretical literature on fair division, whose definition (Foley 1967) differs from the more casual use of the word in the experimental literature. We present and discuss results from free-form bargaining experiments on fair division problems where the role of envy in Foley’s sense can be analyzed and compared to social preferences. We find that envy freeness does matter as a secondary criterion.
    Keywords: Fairness, Envy Freeness, Social Preferences, Bargaining
    JEL: A13 C78 C91 D63
    Date: 2004–12
  7. By: Dorothea K. Herreiner; Clemens Puppe
    Abstract: In this paper, we report on a series of free-form bargaining experiments in which two players have to distribute four indivisible goods among themselves. In one treatment the monetary payoffs associated with each bundle of goods are common knowledge; in a second treatment only the ordinal ranking of the bundles is given. We find that in both cases, the following qualitative rule yields a good explanation of individual behavior: First determine the most equal distribution, then find a Pareto improvement provided that this does not create “too much” inequality. In the ordinal treatment, individuals apparently use the ranks in the respective preference orderings over bundles as a substitute for the unknown monetary value. Interestingly, we find much less Pareto-damaging behavior due to inequality aversion in the ordinal treatment.
    Date: 2004–09
  8. By: Heike Hennig-Schmidt; Zhu-Yu Li; Chaoliang Yang
    Abstract: When using the strategy method in ultimatum bargaining, many researchers ask responders for the minimal acceptable offer only implicitly assuming strategies to be monotone. Recent research has shown, however, that subjects decline disadvantageous and advantageous proposals. We report on an ultimatum game video experiment where more than 50 percent of the responders rejected advantageous offers. Proposers and responders acted together in groups of three people each and were video taped during decision making. The videotapes then were content analyzed. Our experimental design provides the unique opportunity to learn from participants’ spontaneous discussions about their motivations for rejecting advantageous offers. Main motives are social concern, non-expectancy of high offers, emotional, ethical, and moral reasons, group-specific decision rules and aversion against unpleasant numbers.
    Keywords: ultimatum game, video experiments, strategy method, content analysis, non-monotone strategies, social preferences
    JEL: C78 C81 C91 C92 F00 O53 O57
    Date: 2004–12
  9. By: Jonathan Levin (Stanford University); Susan Athey (Stanford University and NBER); Enrique Seira (Stanford University)
    Abstract: We study entry and bidding patterns in sealed bid and open auctions with heterogeneous bidders. Using data from U.S. Forest Service timber auctions, we document a set of systematic effects of auction format: sealed bid auctions attract more small bidders, shift the allocation towards these bidders, and can also generate higher revenue. We propose a model, which extends the theory of private value auctions with heterogeneous bidders to capture participation decisions, that can account for these qualitative effects of auction format. We then calibrate the model using parameters estimated from the data and show that the model can explain the quantitative effects as well. Finally, we use the model to provide an assessment of bidder competitiveness, which has important consequences for auction choice.
    Keywords: Auctions, Timber
    JEL: Q23 D44
    Date: 2004–12
  10. By: Patrick Bajari (Duke University and NBER); Stephanie Houghton (Duke University); Steven Tadelis (Stanford University)
    Abstract: When procurement contracts are incomplete, they are frequently changed after the contract is awarded to the lowest bidder. This results in a final cost that differs from the initial price, and may involve significant transaction costs due to renegotiation. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway repair contracts. We estimate the magnitude of transaction costs and their impact using both reduced form and fully structural models. Our results suggest that transactions costs are a significant and important determinant of observed bids, and that bidders strategically respond to contractual incompleteness. Our findings point at disadvantages of the traditional bidding process that are a consequence of transaction costs from contract adaptations.
    Keywords: Procurement, Construction
    JEL: D23 D82 H57 L14 L22 L74
    Date: 2004–12
  11. By: Jason Barr; Francesco Saraceno
    Abstract: We study the dynamics of firm size in a repeated Cournot game with unkown demand function. We model the firm as a type of artificial neural network. Each period it must learn to map environmental signals to both demand parameters and its rival's output choice. But this learning game is in the background, and we focus on the endogenous adjustment of network size. We investigate the long-run behavior of firm/network size as a function of profits, rival's size, and the type of adjustment rules used.
    Keywords: Firm size, adjustment dynamics, artificial neural networks, Cournot games
    JEL: C63 D21 D83 L13
  12. By: Victor Ginsburgh (How to Win Twice at an Auction. On the Incidence of Commissions in Auction Markets); Patrick Legros (ECARES, Université Libre de Bruxelles and CEPR); Nicolas Sahuguet (ECARES, Université Libre de Bruxelles)
    Abstract: We analyze the welfare consequences of an increase in the commissions charged by the organizer of an auction. Commissions are similar to taxes imposed on buyers and sellers and the economic problem that results looks similar to the question of tax incidence in consumer economics. We argue, however, that auction markets deserve a separate treatment. Indeed we show that an increase in commissions makes sellers worse off, but some (or all) buyers may gain. The results are therefore strikingly different from the standard result that all consumers lose after a tax or a commission increase. We apply our results to comment on the class action against Christie’s and Sotheby’s and argue that the method used to distribute compensations was misguided.
    Keywords: Auction, Intermediation, Commissions, Welfare
    JEL: D44 D80
    Date: 2004–12
  13. By: Claudio Mezzetti (University of North Carolina); Aleksandar Pekec (The Fuqua School of Business, Duke University); Ilia Tsetlin (INSEAD)
    Abstract: We study sequential and single-round uniform-price auctions with affiliated values. We derive symmetric equilibrium for the auction in which k1 objects are sold in the first round and k2 in the second round, with and without revelation of the first-round winning bids. We demonstrate that auctioning objects in sequence generates a lowballing effect that reduces first-round revenue. Thus, revenue is greater in a single-round, uniform auction for k = k1 + k2 objects than in a sequential uniform auction with no bid announcement. When the first-round winning bids are announced, we also identify two informational effects: a positive effect on second-round price and an ambiguous effect on first-round price. The expected first-round price can be greater or smaller than with no bid announcement, and greater or smaller than the expected price in a single-round uniform auction. As a result, total expected revenue in a sequential uniform auction with winning-bids announcement can be greater or smaller than in a single-round uniform auction.
    Keywords: Multi-unit auctions, Sequential auctions, Uniform-price auction, Affiliated values, Information revelation
    JEL: D44 D42
    Date: 2004–12
  14. By: John Asker (Harvard University); Estelle Cantillon (Harvard Business School)
    Abstract: This paper studies multi-attribute auctions in which a buyer seeks to procure a complex good and evaluate offers using a quasi-linear scoring rule. Suppliers have private information about their costs, which is summarized by a multi-dimensional type. The scoring rule reduces the multidimensional bids submitted by each supplier to a single dimension, the score, which is used for deciding on the allocation and the resulting contractual obligation. We exploit this idea and obtain two kinds of results. First, we characterize the set of equilibria in quasi-linear scoring auctions with multi-dimensional types. In particular, we show that there exists a mapping between the class of equilibria in these scoring auctions and those in standard single object IPV auctions. Second, we prove a new expected utility equivalence theorem for quasi-linear scoring auctions.
    Keywords: Auctions, Procurement
    JEL: H57 D44
    Date: 2004–12
  15. By: Philip A. Haile (Yale University); Han Hong (Duke University); Matthew Shum (Johns Hopkins University)
    Abstract: We develop tests for common values at first-price sealed-bid auctions. Our tests are nonparametric, require observation only of the bids submitted at each auction, and are based on the fact that the “winner’s curse” arises only in common values auctions. The tests build on recently developed methods for using observed bids to estimate each bidder’s conditional expectation of the value of winning the auction. Equilibrium behavior implies that in a private values auction these expectations are invariant to the number of opponents each bidder faces, while with common values they are decreasing in the number of opponents. This distinction forms the basis of our tests. We consider both exogenous and endogenous variation in the number of bidders. Monte Carlo experiments show that our tests can perform well in samples of moderate sizes. We apply our tests to two different types of U.S. Forest Service timber auctions. For unit-price (“scaled”) sales often argued to fit a private values model, our tests consistently fail to find evidence of common values. For “lumpsum” sales, where a priori arguments for common values appear stronger, our tests yield mixed evidence against the private values hypothesis.
    Keywords: First-price auctions, Common values, Private values, Nonparametric testing, Winner’s curse, Stochastic dominance, Endogenous participation, Timber auctions
    JEL: C14 D44
    Date: 2004–12
  16. By: Maria Demertzis; Nicola Viegi
    Abstract: The benefits of inflation targeting by comparison to alternative regimesare understood to be in terms of providing clearer objectives that help pin down private sector expectations in the long run. We argue that the mechanism for achieving this rests on the fact that monetary policy can be perceived as a matching game in which private agents aim to coordinate their expectations and thus benefit from a clearly given signal that acts as a focal point. We therefore, argue that first, the credibility of the signal achieves coordination and second that the clarity of the signal achieves welfare improvements. To demonstrate that we use Bacharach's, Variable Universe Game framework, which allows for individuals' understanding and interpretation of the signal to differ. As private agents benefit from coordination, they rely a lot on the public signal given. Following this, the Central Bank can then help increase the welfare of agents by providing clear and precise signal that increase the chance of coordination and hence increased welfare.
    Keywords: inflation targeting; high order expectations; matching games
    JEL: C71 C78 E52
    Date: 2004–11
  17. By: Samita Sareen (Duke University); Ali Hortacsu (University of Chicago)
    Abstract: Using data on Government of Canada securities auctions, this paper shows that in countries where direct access to primary issuance is restricted to government securities dealers, Order-flow" information is a key source of private information for these security dealers. Order-flow information is revealed to a security dealer through his interactions with customers, who can place bids in the auctions only through the security dealer. Since each dealer interacts with a different set of customers, they, in effect, see different portions of the market demand and supply curves, leading to differing private inferences of where the equilibrium price might.
    Keywords: Treasury auctions, Behavioural finance
    JEL: D82 G14 L88
    Date: 2004–12
  18. By: Alejandro M. Manelli (Arizona State University); Daniel R. Vincent (University of Maryland)
    Abstract: The seller of N distinct objects is uncertain about the buyer’s valuation for those objects. The seller’s problem, to maximize expected revenue, consists of maximizing a linear functional over a convex set of mechanisms. A solution to the seller’s problem can always be found in an extreme point of the feasible set. We identify the relevant extreme points and faces of the feasible set. With N = 1, the extreme points are easily described providing simple proofs of well-known results. The revenue-maximizing mechanism assigns the object with probability one or zero depending on the buyer’s report. With N > 1, extreme points often involve randomization in the assignment of goods. Virtually any extreme point of the feasible set maximizes revenue for a well-behaved distribution of buyer’s valuations. We provide a simple algebraic procedure to determine whether a mechanism is an extreme point.
    Keywords: Extreme point, Exposed point, Faces, Non-linear pricing, Monopoly pricing, Multidimensional, Screening, Incentive compatibility, Adverse selection, Mechanism design
    JEL: D44
    Date: 2004–12
  19. By: Gorobets, A.; Nooteboom, B. (Erasmus Research Institute of Management (ERIM), Erasmus University Rotterdam)
    Abstract: This paper employs the methodology of Agent-Based Computational Economics (ACE) to investigate under what conditions trust can be viable in markets. The emergence and breakdown of trust is modeled in a context of multiple buyers and suppliers. Agents adapt their trust in a partner, the weight they attach to trust relative to profitability, and their own trustworthiness, modeled as a threshold of defection. Adaptation occurs on the basis of realized profit. Trust turns out to be viable under fairly general conditions.
    Keywords: Agent-based computational economics;transaction costs;trust;
    Date: 2005–01–03

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