nep-gth New Economics Papers
on Game Theory
Issue of 2008‒01‒12
thirteen papers chosen by
Laszlo A. Koczy
University of Maastricht

  1. Existence of Nash Networks in One-Way Flow Models By Pascal Billand; Christophe Bravard; Sudipta Sarangi
  2. Do repeated game players detect patterns in opponents? Revisiting the Nyarko & Schotter belief elicitation experiment By Spiliopoulos, Leonidas
  3. The Paradox of New Members: Strategic Foundations and Experimental Evidence By Michalis Drouvelis; Maria Montero; Martin Sefton
  4. The Paradox of New Members in the Council of Ministers: A Noncooperative Approach By Maria Montero
  5. Strategic Information Extraction Through Networks By Antonio Jimenez-Martinez
  6. Unifying Identity-Specific and Financial Externalities in Auction Design By Lu, Jingfeng
  7. Minimax regret and strategic uncertainty By Ludovic Renou; Karl H. Schlag
  8. Telling the Truth May Not Pay Off: An Empirical Study of Centralised University Admissions in Germany By Sebastian Braun; Nadja Dwenger; Dorothea Kübler
  9. Policy games, policy neutrality and Tinbergen controllability under rational expectations By Di Bartolomeo Giovanni; Hughes Hallett Andrew; Acocella Nicola
  10. Active firms in horizontal mergers and cartel stability By Emilie Dargaud
  11. Virtual world experimentation: An exploratory study By Thomas Chesney; Swee-Hoon Chuah; Robert Hoffmann
  12. The limits of self-governance when cooperators get punished: Experimental evidence from urban and rural Russia By Simon Gaechter; Benedikt Herrmann
  13. Competitive Equilibrium and Reputation under Imperfect Public Monitoring By Bernardita Vial

  1. By: Pascal Billand; Christophe Bravard; Sudipta Sarangi
    Abstract: This paper addresses the existence of Nash equilibria in one-way flow or directed network models in a number of different settings. In these models players form costly links with other players and obtain resources from them through the directed path connecting them. We find that heterogeneity in the costs of establishing links play a crucial role in the existence of Nash networks. We also provide conditions for the existence of Nash networks in models where costs and values of links are heterogeneous.
    Keywords: Network Formation, Non-cooperative Games
    JEL: C72 D85
    Date: 2007
  2. By: Spiliopoulos, Leonidas
    Abstract: The purpose of this paper is to reexamine the seminal belief elicitation experiment by Nyarko and Schotter (2002) under the prism of pattern recognition. Instead of modeling elicited beliefs by a standard weighted fictitious play model this paper proposes a generalized variant of fictitious play that is able to detect two period patterns in opponents’ behavior. Evidence is presented that these generalized pattern detection models provide a better fit than standard weighted fictitious play. Individual heterogeneity was discovered as ten players were classified as employing a two period pattern detection fictitious play model, compared to eleven players who followed a non-pattern detecting fictitious play model. The average estimates of the memory parameter for these classes were 0.678 and 0.456 respectively, with five individual cases where the memory parameter was equal to zero. This is in sharp contrast to the estimates obtained from standard weighted fictitious play models which are centred on one, a bias introduced by the absence of a constant in these models. Non-pattern detecting fictitious play models with memory parameters of zero are equivalent to the win-stay/lose-shift heuristic, and therefore some sub jects seem to be employing a simple heuristic alternative to more complex learning models. Simulations of these various belief formation models show that that this simple heuristic is quite effective against other more complex fictitious play models.
    Keywords: learning; game theory; behavioral game theory; fictitious play; repeated games; mixed strategy; non-cooperative games; pattern recognition; pattern detection; experimental economics; beliefs; belief elicitation; strategic
    JEL: C9 C63 C73 C72
    Date: 2008–01–09
  3. By: Michalis Drouvelis (School of Economics, University of Nottingham); Maria Montero (School of Economics, University of Nottingham); Martin Sefton (School of Economics, University of Nottingham)
    Abstract: Power indices suggest that adding new members to a voting body may affect the balance of power between the original members even if their number of votes and the decision rule remain constant. Some of the original members may actually gain, a phenomenon known as the paradox of new members. We show that the paradox can occur as an equilibrium of a noncooperative bargaining game based on the Baron-Ferejohn (1989) model of legislative bargaining. We implement this game in the laboratory and find empirical support for the paradox.
    Keywords: voting, non-cooperative bargaining, power indices, experiments, paradox of new members
    JEL: C70 C92
    Date: 2007–12
  4. By: Maria Montero (University of Nottingham)
    Abstract: Power indices suggest that adding new members to a voting body may increase the power of an existing member, even if the number of votes of all existing members and the decision rule remain constant. This phenomenon is known as the paradox of new members. This paper shows that the paradox has theoretically occurred in the EU using the leading model of legislative bargaining. Furthermore, it is possible for a majority of members to be in favor of enlargement, even if voters are bargaining over a fixed budget.
    Keywords: legislative bargaining, weighted voting, power measures, EU enlargement, paradox of new members
    JEL: C71 C72 C78
    Date: 2007–12
  5. By: Antonio Jimenez-Martinez (School of Economics, Universidad de Guanajuato)
    Abstract: We develop a model of information transmission in networks where agents decide on costly information extraction from their neighbors. Agents have incomplete and complementary information about the underlying state. For a exogenously given network, each agent decides first on information extraction from her neighbors and then, after processing the information extracted, takes an action. The payoff to each agent has two components: (i) a concern about oneÕs own action and (ii) a concern about the other agentsÕ actions or team concern. We formalize the extraction of information by considering that each agent is able, by incurring a cost, to induce each of her neighbors to send her a signal. Then, each receiver updates her beliefs according to BayesÕ rule. We characterize both the efficient and the equilibrium information extraction strategy profiles for the overall game and relate them to the network architecture.
    Keywords: Communication Networks, Incomplete Information, Information Extraction, Complementarities, Coordination
    JEL: C72 D82 D83 D85
  6. By: Lu, Jingfeng
    Abstract: Coexistence of identity-specific and financial externalities among bidders is a salient feature of auctions with buyers who are cross shareholders or competing firms in an oligopoly. This paper unifies these two types of externalities in revenue-maximizing auction design. Our main findings are the following. First, these two types of externalities can be unified through the framework of Myerson (1981). Both affect the winning probabilities through their impact on players' externality-augmented virtual values, while their impact on buyers' payments is reflected by an externality-correcting component for each type of externalities, which equals the respective externalities. These components eliminate strategic bidding that would arise from the existence of externalities. Second, the two types of externalities interact fundamentally through shaping players' virtual values. At the optimum, the player with the highest externality-augmented virtual value wins given that it is positive, otherwise seller physically destroys the item. Financial externalities amplify the impact of the identity-specific externalities on winning probabilities. Third, our approach is applicable to revenue-maximizing auction design with cross shareholding. Fourth, our finding renders an approach for revenue-maximizing auction design with asymmetric financial externalities. Particularly, when seller does not value the object, a revenue-maximizing auction can be obtained from any revenue-maximizing auction for a regular setting without externalities by solely transforming the payments.
    Keywords: Auction design; Financial Externalities; Identity-Specific Externalities
    JEL: D44 D82
    Date: 2006–09
  7. By: Ludovic Renou; Karl H. Schlag
    Abstract: This paper introduces the concept of minimax regret equilibrium, a close relative of Nash equilibrium, which accommodates the possibility that players are uncertain about the rationality and conjectures of their opponents. We provide several applications of our concept. In particular, we consider price-setting environments and show that optimal pricing policy follows a non-degenerate distribution. The induced price dispersion is consistent with experimental and empirical observations (Baye and Morgan (2004)).
    Keywords: minimax regret; rationality; price dispersion; auction
    JEL: C7
    Date: 2008–01
  8. By: Sebastian Braun (Humboldt University Berlin); Nadja Dwenger (DIW Berlin); Dorothea Kübler (Technical University Berlin and IZA)
    Abstract: We investigate the matching algorithm used by the German central clearinghouse for university admissions (ZVS) in medicine and related subjects. This mechanism consists of three procedures based on final grades from school ("Abiturbestenverfahren", "Auswahlverfahren der Hochschulen") and on waiting time ("Wartezeitverfahren"). While these procedures differ in the criteria applied for admission they all make use of priority matching. In priority matching schemes, it is not a dominant strategy for students to submit their true preferences. Thus, strategic behaviour is expected. Using the full data set of applicants, we are able to detect some amount of strategic behaviour which can lead to inefficient matching. Alternative ways to organize the market are briefly discussed.
    Keywords: matching, university admissions, strategic behaviour
    JEL: C78 D02 D78 I29
    Date: 2007–12
  9. By: Di Bartolomeo Giovanni; Hughes Hallett Andrew; Acocella Nicola
    Abstract: This paper shows the relationship between static controllability (the well-known Tinbergen golden rule), and the existence and other properties of the Nash equilibrium in a dynamic setting with rational expectations for future behavior. We show how to determine the existence of equilibrium outcomes; the conditions under which no equilibrium exists; and who will get to dominate (or who will find their policies to have become ineffective) in those equilibria, without having to compute and enumerate all the possible equilibria directly.
    Keywords: Policy games, policy effectiveness, controllability, Nash equilibrium existence, rational expectations
    JEL: C72 E52 E61
    Date: 2008–01
  10. By: Emilie Dargaud (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: In this paper, we study the optimal number of active firms in a<br />coalition and in a merger. We consider two kinds of game : a merger game<br />and a coalition game, both in the context of price competition with horizontal<br />product differentiation. These are two-stage games. The first stage consists<br />of determining the number of active firms; the second stage is price competition<br />between active firms. Firms belonging to the same owner or to the<br />same coalition play cooperatively between themselves but face competition<br />between other firms.<br />We show that when there is no competitive pressure (i.e. no outside firm)<br />then only merged equilibria can occur in the merger case. In the coalition<br />case we obtain a similar result in which the number of active firms in the<br />second stage is less than the initial number of firms.<br />Moreover we show that if competitive pressure is high enough then the<br />initial number of firms in the industry is the same as the number of active<br />firms in the last stage for each kind of game.
    Keywords: Mergers ; Coalitions ; Product differentiation
    Date: 2007
  11. By: Thomas Chesney (Nottingham University Business School); Swee-Hoon Chuah (Nottingham University Business School); Robert Hoffmann (Nottingham University Business School)
    Abstract: We explore the scientific potential of virtual worlds for experimental economists. In particular, we report the results of a series of virtual world experiments designed to examine the suitability of (a) users as subjects and (b) the computer interface as an experimental platform. Formal results and informal observations from the sessions are discussed in terms of the methodological opportunities and challenges of virtual experimentation generally.
    Keywords: virtual worlds, laboratory experiments, human values survey
    JEL: C72 C88 C99 Z13
    Date: 2007–12
  12. By: Simon Gaechter (University of Nottingham); Benedikt Herrmann (University of Nottingham)
    Abstract: We report evidence from public goods experiments with and without punishment which we conducted in Russia with 566 urban and rural participants of young and mature age cohorts. Russia is interesting for studying voluntary cooperation because of its long history of collectivism, and a huge urban-rural gap. In contrast to previous experiments we find no cooperation-enhancing effect of punishment. An important reason is that there is substantial punishment of high contributors in all four subject pools. Thus, punishment can also undermine the scope for self-governance in the sense of high levels of voluntary cooperation that are sustained by sanctioning free riders only.
    Keywords: social norms, free riding, misdirected punishment, experiments
    JEL: H41 C91 D23 C72
    Date: 2007–11
  13. By: Bernardita Vial (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: In this paper we analyze a reputation-based mechanism that sustains the provision of high quality in a market for an experience good. In contrast to existing models of reputation, however, we consider a competitive market: there is a continuum of firms, each serving at most one consumer each period. We assume a perpetual probability of type replacement and imperfect public monitoring, and we analyze the evolution of firms' reputations in the high quality equilibrium. We find that there is an invariant long run distribution of firms' reputations: each firm's reputation changes every period even in the long run, but the population distribution of reputations remains constant. We consider the long run distribution of firms' reputations to further characterize the steady-state high quality equilibrium. In the equilibrium of the stage game firms with a higher reputation charge a higher price. Furthermore, we show that if the cost of high quality is decreasing in some consumer's characteristic, then buyers pay personalized prices in equilibrium.
    Keywords: reputation, incomplete information, perfect competition, general equilibrium
    JEL: C70 D80
    Date: 2008

This nep-gth issue is ©2008 by Laszlo A. Koczy. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.