nep-gth New Economics Papers
on Game Theory
Issue of 2021‒04‒05
eighteen papers chosen by
Sylvain Béal
Université de Franche-Comté

  1. Local Dominance By Catonini, Emiliano; Xue, Jingyi
  2. A Note on Stabilizing Cooperation in the Centipede Game By Brams, Steven; Kilgour, Marc
  3. Dynamic Oligopoly Pricing with Asymmetric Information: Implications for Horizontal Mergers By Andrew Sweeting; Xuezhen Tao; Xinlu Yao
  4. Collective Brand Reputation By Volker Nocke; Roland Strausz
  5. The Political Economy of Responses to COVID-19 in the U.S.A. By Zhihan Cui; Geoffrey Heal; Howard Kunreuther; Lu Liu
  6. Patent Auctions and Bidding Coalitions: Structuring the Sale of Club Goods By John Asker; Mariagiovanna Baccara; SangMok Lee
  7. Myopic Oligopoly Pricing By Bos, Iwan; Marini, Marco A.; Saulle, Riccardo D.
  8. Imperfect competition in electricity markets with partially flexible technologies By Crampes, Claude; Renault, Jérôme
  9. Common pool resource management and risk perceptions By Can Askan Mavi; Nicolas Quérou
  10. Differentiation in a Two-Dimensional Market with Endogenous Sequential Entry By Jeffrey D. Michler; Benjamin M. Gramig
  11. Efficiency and Stability in a Process of Teams Formation By Leonardo Boncinelli; Alessio Muscillo; Paolo Pin
  12. Limited Cognitive Abilities and Dominance Hierarchy By Hanyuan Huang; Jiabin Wu
  13. Oligopsony and Minimum Wages By Hernán Vallejo
  14. A Dynamic Theory of Regulatory Capture By Alessandro De Chiara; Marco Alexander Schwarz
  15. The Formation of Global Free Trade Agreement By Akira Okada; Yasuhiro Shirata
  16. Robust Experimentation in the Continuous Time Bandit Problem By Farzad Pourbabaee
  17. Tolerant moral judgment drives evolution of collective action By Radzvilavicius, Arunas
  18. Symmetry and financial Markets By Jørgen Vitting Andersen; Andrzej Nowak

  1. By: Catonini, Emiliano (Higher School of Economics, ICEF); Xue, Jingyi (School of Economics, Singapore Management University)
    Abstract: We define a local notion of weak dominance that speaks to the true choice problems among actions in a game tree and does not necessarily require to plan optimally for the future. A strategy is (globally) weakly dominant if and only if it prescribes a locally weakly dominant action at every decision node it reaches, and in this case local weak dominance is characterized by a (wishful-thinking) condition that requires no forward planning. From this local perspective, we identify form of contingent reasoning that are particularly natural, despite the absence of an obviously dominant strategy (Li, 2017). Following this approach, we construct a dynamic game that implements the Top Trading Cycles allocation under a notion of local obvious dominance that captures a form of independence of irrelevant alternatives.
    Keywords: Weak dominance; obvious dominance; strategy-proofness; implementation
    Date: 2020–12–22
  2. By: Brams, Steven; Kilgour, Marc
    Abstract: In the much-studied Centipede Game, which resembles Iterated Prisoners’ Dilemma, two players successively choose between (1) cooperating, by continuing play, or (2) defecting and terminating play. The subgame-perfect Nash equilibrium implies that play terminates on the first move, even though continuing play can benefit both players—but not if the rival defects immediately, which it has an incentive to do. We show that, without changing the structure of the game, interchanging the payoffs of the two players provides each with an incentive to cooperate whenever its turn comes up. The unique Nash equilibrium in the transformed Centipede Game, called the Reciprocity Game, is unique—unlike the Centipede Game, where there are many Nash equilibria. The Reciprocity Game can be implemented noncooperatively by adding, at the start of the Centipede Game, a move to exchange payoffs, which it is rational for the players to choose. What this interchange signifies, and its application to transforming an arms race into an arms-control treaty, are discussed.
    Keywords: Centipede Game; Prisoners’ Dilemma; Subgame-Perfect Equilibrium; Payoff Exchange
    JEL: C7 C72 D63
    Date: 2021–03
  3. By: Andrew Sweeting; Xuezhen Tao; Xinlu Yao
    Abstract: We model differentiated product pricing by firms that possess private information about serially-correlated state variables, such as their marginal costs, and can use prices to signal information to rivals. In a dynamic game, signaling can raise prices significantly above static complete information Nash levels even when the privately observed state variables are restricted to lie in narrow ranges. We calibrate our model using data from the beer industry, and we show that our model can explain changes in price levels and price dynamics after the 2008 MillerCoors joint venture.
    JEL: D43 D82 L13 L41 L90
    Date: 2021–03
  4. By: Volker Nocke; Roland Strausz
    Abstract: We develop a theory of collective brand reputation for markets in which product quality is jointly determined by local and global players. In a repeated game of imperfect public monitoring, we model collective branding as a pooling of quality signals generated in different markets. Such pooling yields a beneficial informativeness effect for the actions of a global player present in all markets, but also harmful free-riding by local, market-specific players. The resulting tradeoff yields a theory of optimal brand size and revenue sharing, applying to platform markets, franchising, licensing, umbrella branding, and firms with team production.
    Keywords: Collective branding, reputation, free riding, repeated games, imperfect monitoring
    JEL: L14 L15 D20 D82
    Date: 2021–03
  5. By: Zhihan Cui; Geoffrey Heal; Howard Kunreuther; Lu Liu
    Abstract: Social distancing via shelter-in-place strategies, and wearing masks, have emerged as the most effective non-pharmaceutical ways of combatting COVID-19. In the United States, choices about these policies are made by individual states. We develop a game-theoretic model and then test it econometrically, showing that the policy choices made by one state are strongly influenced by the choices made by others. If enough states engage in social distancing or mask wearing, they will tip others that have not yet done so to follow suit and thus shift the Nash equilibrium. If interactions are strongest amongst states of similar political orientations there can be equilibria where states with different political leanings adopt different strategies. In this case a group of states of one political orientation may by changing their choices tip others of the same orientation, but not those whose orientations differ. We test these ideas empirically using probit and logit regressions and find strong confirmation that inter-state social reinforcement is important and that equilibria can be tipped. Policy choices are influenced mainly by the choices of other states, especially those of similar political orientation, and to a much lesser degree by the number of new COVID-19 cases. The choice of mask-wearing policy shows more sensitivity to the actions of other states than the choice of SIP policies, and republican states are much less likely to introduce mask-wearing policies. The choices of both types of policies are influenced more by political than public health considerations.
    JEL: H7 I1
    Date: 2021–03
  6. By: John Asker; Mariagiovanna Baccara; SangMok Lee
    Abstract: Auctioneers of patents are observed to allow joint bidding by coalitions of buyers. These auctions are distinguished by the good for sale being non-rivalrous, but still excludable, in consumption{that is, they auctions of club goods. This affects how coalitional bidding impacts auction performance. We study the implications of coalitions of bidders on second-price (or equivalently, ascending-price) auctions. Although the formation of coalitions can benefit the seller, we show that stable coalition profiles tend to consist of excessively large coalitions, to the detriment of both auction revenue and social welfare. Limiting the permitted coalition size increases efficiency and confers benefits on the seller. Lastly, we compare the revenues generated by patent auctions and multi-license auctions, and we find that the latter are superior in a large class of environments.
    JEL: D44 D47 K21 L14 L24 L4 O34
    Date: 2021–03
  7. By: Bos, Iwan; Marini, Marco A.; Saulle, Riccardo D.
    Abstract: This paper examines capacity-constrained oligopoly pricing with sellers who seek myopic improvements. We employ the Myopic Stable Set stability concept and establish the existence of a unique pure-strategy price solution for any given level of capacity. This solution is shown to coincide with the set of pure-strategy Nash equilibria when capacities are large or small. For an intermediate range of capacities, it predicts a price interval that includes the mixed-strategy support. This stability concept thus encompasses all Nash equilibria and offers a pure-strategy solution when there is none in Nash terms. In particular, it provides a behavioral rationale for different types of pricing dynamics, including real-world economic phenomena such as Edgeworth-like price cycles, price dispersion and supply shortages.
    Keywords: Demand and Price Analysis
    Date: 2021–04–01
  8. By: Crampes, Claude; Renault, Jérôme
    Abstract: The producers of electricity using dispatchable plants rely on partially flexible technologies to match the variability of demand and intermittent renewables. We analyse flexibility in a two-stage decision process where production decided at the last moment is more costly than if it is planned in advance. We first determine the first best outputs, prices and gains. We then consider a model where two partially flexible firms compete in quantities to supply a random residual demand. We determine the subgame perfect equilibria corresponding to two market designs: one where all trade occurs in a spot market with known demand, the other where a day-ahead market with random demand is added to the ex-post market, first in a general setting, then using a quadratic specification. We show that when all trade occurs ex post, the least flexible firm is not necessarily disadvantaged. We also show that adding a day-ahead market makes consumers better off and firms worse off by increasing total output. It increases welfare but it also transfers risks from firms to consumers.
    Keywords: Flexibility; electricity; market design; production costs; risk transfer
    JEL: C72 D24 D47 L23 L94
    Date: 2021–03
  9. By: Can Askan Mavi (University of Luxembourg [Luxembourg]); Nicolas Quérou (CEE-M - Centre d'Economie de l'Environnement - Montpellier - UMR 5211 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Motivated by recent discussions about the issue of risk perceptions for climate change related events,we introduce a non-cooperative game setting where agents manage a common pool resource under a po-tential risk, and agents exhibit different risk perception biases. Focusing on the effect of the polarizationlevel and other population features, we show that the type of bias (overestimation versus underestimationbiases) and the resource quality level before and after the occurrence of the shift have first-order impor-tance on the qualitative nature of behavioral adjustments and on the pattern of resource conservation.When there are non-uniform biases within the population, the intra-group structure of the populationqualitatively affects the degree of resource conservation. Moreover, unbiased agents may react in non-monotone ways to changes in the polarization level when faced with agents exhibiting different types ofbias. The size of the unbiased agents' sub-population does not qualitatively affect how an increase inthe polarization level impacts individual behavioral adjustments, even though it affects the magnitudeof this change. Finally, it is shown how perception biases affect the comparison between centralized anddecentralized management.
    Keywords: Conservation,Perception bias,Environmental risk,Renewable resources,Dynamic games,Dynamic games JEL Classification: Q20,Q54,D91,C72
    Date: 2020–12–10
  10. By: Jeffrey D. Michler; Benjamin M. Gramig
    Abstract: Previous research on two-dimensional extensions of Hotelling's location game has argued that spatial competition leads to maximum differentiation in one dimensions and minimum differentiation in the other dimension. We expand on existing models to allow for endogenous entry into the market. We find that competition may lead to the min/max finding of previous work but also may lead to maximum differentiation in both dimensions. The critical issue in determining the degree of differentiation is if existing firms are seeking to deter entry of a new firm or to maximizing profits within an existing, stable market.
    Date: 2021–03
  11. By: Leonardo Boncinelli; Alessio Muscillo; Paolo Pin
    Abstract: Motivated by data on coauthorships in scientific publications, we analyze a team formation process that generalizes matching models and network formation models, allowing for overlapping teams of heterogeneous size. We apply different notions of stability: myopic team-wise stability, which extends to our setup the concept of pair-wise stability, coalitional stability, where agents are perfectly rational and able to coordinate, and stochastic stability, where agents are myopic and errors occur with vanishing probability. We find that, in many cases, coalitional stability in no way refines myopic team-wise stability, while stochastically stable states are feasible states that maximize the overall number of activities performed by teams.
    Date: 2021–03
  12. By: Hanyuan Huang; Jiabin Wu
    Abstract: We propose a novel model to explain the mechanism behind dominance hierarchy structures. Guided by a predetermined social convention, individuals with limited cognitive abilities optimize their strategies in a Hawk-Dove game. We find that several commonly observed hierarchical structures in the nature such as linear hierarchy and despotism, emerge as the total fitness maximizing social structures given different levels of cognitive abilities.
    Date: 2021–03
  13. By: Hernán Vallejo
    Abstract: This article presents a model of oligopsony. It considers different conjectural variations that cover the whole range between the extreme cases of monopsony and perfect competition, such as Collusion, Threat, Cournot, Stackelberg, and Bertrand, and compares them in terms of prices, quantities, profits, mark-down, price elasticity of supply and welfare. It also considers the impact of minimum wages, under the different conjectures analyzed.
    Keywords: Oligopsony, Collusion, Threat, Cournot, Stackelberg, Bertrand, mark-down, minimium wages
    JEL: C72 J21 J38 J48
    Date: 2021–03–24
  14. By: Alessandro De Chiara; Marco Alexander Schwarz
    Abstract: Firms often try to influence individuals that, like regulators, are tasked with advising or deciding on behalf of a third party. In a dynamic regulatory setting, we show that a firm may prefer to capture regulators through the promise of a lucrative future job opportunity (i.e., the revolving-door channel) than through a hidden payment (i.e., a bribe). This is because the revolving door publicly signals the firm’s eagerness and commitment to rewarding lenient regulators, which facilitates collusive equilibria. We find that opening the revolving door conditional on the regulator’s report is usually more efficient than a blanket ban on post-agency employment and may increase social welfare. This insight extends to a variety of applications and can also be used to determine the optimal length of cooling-off periods.
    Keywords: collusion, cooling-off periods, corruption, dynamic games, experts, regulation, regulatory capture, revolving door
    JEL: D73 D86 H11 J45 L51
    Date: 2021
  15. By: Akira Okada; Yasuhiro Shirata
    Abstract: We investigate the formation of Free Trade Agreement (FTA) in a competing importers framework with $n$ countries. We show that (i) FTA formation causes a negative externality to non-participants, (ii) a non-participant is willing to join an FTA, and (iii) new participation may decrease the welfare of incumbent participants. A unique subgame perfect equilibrium of a sequential FTA formation game does not achieve global free trade under an open-access rule where a new applicant needs consent of members for accession, currently employed by many open regionalism agreements including APEC. We further show that global FTA is a unique subgame perfect equilibrium under an open-access rule without consent.
    Date: 2021–03
  16. By: Farzad Pourbabaee
    Abstract: We study the experimentation dynamics of a decision maker (DM) in a two-armed bandit setup (Bolton and Harris (1999)), where the agent holds ambiguous beliefs regarding the distribution of the return process of one arm and is certain about the other one. The DM entertains Multiplier preferences a la Hansen and Sargent (2001), thus we frame the decision making environment as a two-player differential game against nature in continuous time. We characterize the DM value function and her optimal experimentation strategy that turns out to follow a cut-off rule with respect to her belief process. The belief threshold for exploring the ambiguous arm is found in closed form and is shown to be increasing with respect to the ambiguity aversion index. We then study the effect of provision of an unambiguous information source about the ambiguous arm. Interestingly, we show that the exploration threshold rises unambiguously as a result of this new information source, thereby leading to more conservatism. This analysis also sheds light on the efficient time to reach for an expert opinion.
    Date: 2021–03
  17. By: Radzvilavicius, Arunas (University of Sydney)
    Abstract: In public goods games, the benefit of collective action is shared among all participants, and this creates strong incentives to defect. Theoretical studies and economic experiments predict that without enforcement mechanisms, cooperation in public goods games should collapse. But human societies have repeatedly resolved collective action dilemmas through social norms and institutions. Humans condition their social behavior on the moral reputations of other individuals, and the reputations themselves reflect their past behavior. Here I show how Indirect Reciprocity mechanisms based on group reputations and group-level norms can evolve to promote collective action in public goods games. Individual reputations reflect moral judgments of social behavior within groups, according to the prevailing social norm. Only three norms previously studied as part of Indirect Reciprocity in pairwise games can sustain public goods investments, and their performance depends on how tolerant individuals are to occasional antisocial behavior within groups. When members of the society have predominantly tolerant moral views towards groups, only the norm that abstains from judgment in morally ambiguous interactions (known as ``Staying'') can sustain collective action.
    Date: 2021–01–29
  18. By: Jørgen Vitting Andersen (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique); Andrzej Nowak (Department of Psychology, Warsaw university - UW - University of Warsaw)
    Abstract: It is hard to overstate the importance that the concept of symmetry has had in every field of physics, a fact alluded to by the Nobel Prize winner P.W. Anderson, who once wrote that "physics is the study of symmetry". Whereas the idea of symmetry is widely used in science in general, very few (if not almost no) applications has found its way into the field of finance. Still, the phenomenon appears relevant in terms of for example the symmetry of strategies that can happen in the decision making to buy or sell financial shares. Game theory is therefore one obvious avenue where to look for symmetry, but as will be shown, also technical analysis and long term economic growth could be phenomena which show the hallmark of a symmetry.
    Keywords: Agent-based modelling,Game theory,Ginzburg-Landau theory,financial symmetry
    Date: 2020–07

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