# Markets, Games, and Strategic Behavior/2010

his page is an experiment in student generated answers to homework questions. In Markets, Games, and Strategic Behavior, we covered a diverse number of topics. The lecturer will pose a question and the students will provide the answer(s). Feel free to improve on other students' answers, put alternate answers and pose new questions. Feel free to clarify the questions as well.

Take from class, the Diamond Dybvig model with ${\displaystyle L=.5}$ and ${\displaystyle R=2}$, two impatient depositors and two patient depositors. Each depositor has $1000 to deposit in the bank. Let us say that deposits are insured up to fraction ${\displaystyle f}$. For what values of ${\displaystyle f}$ is there only one equilibrium and what values are there two equilibria? (For each dollar put in the bank yesterday, early withdrawers are guaranteed to get ${\displaystyle 1*f}$ and late get ${\displaystyle 2*f}$.) ### Answer 1 The bank expects the two impatient depositors to withdraw today and the two patient depositors to withdraw tomorrow. Hence, yesterday, the bank sets aside$2000 for today and invests $2000 for tomorrow. Now today, the depositors must decide whether to withdraw today or tomorrow. We assume that the impatient depositors withdraw today. Now We can examine this as a game between the two patient depositors. Each has to decide whether or not to withdraw today. When ${\displaystyle f=0}$ the payoffs as discussed in class.  Today Tomorrow Today$750, $750$1000, $0 Tomorrow$0, $1000$2000, $2000 For a general ${\displaystyle f}$, we must calculate again each of the payoffs. If both withdraw today, the bank can pay the first 3 depositors the$1000. The last depositor will receive ${\displaystyle f}$. Thus, the expected payoff is ${\displaystyle 750+(f/4)*1000}$. If one withdraws today and the other withdraws tomorrow, the bank will be able to pay all three today, and the depositor withdrawing tomorrow receives ${\displaystyle 2000*f}$. Rewriting the game yields.

 Today Tomorrow Today $750+1000*(f/4),$750+1000*(f/4) $1000,$2000*f Tomorrow $2000*f,$1000 $2000,$2000

We see that if one patient depositor withdraws today, the second patient depositor only has incentive to withdraw today if ${\displaystyle 750+1000*(f/4)>=2000*f}$. Hence, if and only if ${\displaystyle f<=3/7}$, there is a possibility of two equilibria.

### Question 2

Part A.

Examine the second treatment of the Beer-Quiche game where there is a 2/3 chance of the proposer being strong.

Payoffs: Proposer, Responder

 Flee Fight Beer (Strong) $1.40,$1.25 $0.60,$0.75 Quiche (Strong) $1.00,$1.25 $0.20,$0.75 Beer (Weak) $1.00,$0.75 $0.20,$1.25 Quiche (Weak) $1.40,$0.75 $0.60,$1.25

Can there be a pooling equilibrium where both proposers choose Quiche and the responder flees? Does this seem reasonable to you? Part B.

 fold call raise (Strong) $1.00, -$1.00 $2.00, -$2.00 fold (Strong) -$1.00,$1.00 -$1.00,$1.00 raise (Weak) $1.00, -$1.00 -$2.00,$2.00 fold (Weak) -$1.00,$1.00 -$1.00,$1.00

Assume the odds of a strong hand is 80%. Find any equilibrium. Is it signalling or pooling? Extra hard: what happens if it is 60%?

(shaked zin)

Part A.

Pooling equilibrium 1 - always choose beer. Pooling equilibrium 2 - always choose quiche - can't be a real equilibrium since it doesn't make sense. TECHNICALLY, IT IS AN EQUILIBRIUM IF THE PROPOSER BELIEVES THE RESPONDER WILL THINK HE IS WEAK IF HE DRINKS BEER. IT DOESN'T MAKE SENSE (NOT INTUITIVE) ACCORDING TO CHO-KREPS SINCE A WEAK PROPOSER WOULD HAVE NO POTENTIAL GAIN FOR DRINKING BEER THUS A PROPOSER DEVIATING MUST BE STRONG.

Part B.

Pooling equilibrium, when the odds are 80% to be strong any player would pretend to be strong and choose to raise the pot.


because: 0.8*(-2)+0.2*2= -1.2 < -1

extra hard: 0.6*(-2)+0.4*2= -0.4 > -1 In this case a weak A knows B would call anyone if all weak A's lie - therefore a weak A will fold and B will fold to anyone raising. its worth mentioning that its good for weak A's to lie once in a while and pretend to be strong and raise - as long as not many of them does so - B will always fold unless more than 0.375 weak A's will lie.

what is it 0.375???

### Question 4

There is a Beersheva to Haifa train line. Travellers either go between Haifa and Tel Aviv with demand ${\displaystyle 12-p}$, Tel Aviv and Beersheva 12-p, Haifa and Beersheva. ${\displaystyle 18-p}$, Say it is all owned by one profit maximizing monopolist with marginal cost of zero. For simplicity assume that the monopolist must set the price of the Haifa-Beersheva route equal to the sum of the other two. a) What would he charge for all three routes?

b) Now say the government thinks it needs to add competition to the rail industry. It divides things into two companies. One takes care of the Haifa-Tel Aviv route and the other the Tel Aviv-Beersheva route. The price of the combined trip is the sum of the other two. What are the new prices? Who wins and who loses?

ANSWERS למי שיש דעות אחרות בנושא?

אבל יש ביקוש עבור כל קו בנפרד, ולא מדובר על קו שלם. לכן לדעתי סכום של רווחים עבור כל קטע מהווה רווח של מונופול עבור קו שלם לכן תשובות שלי, כמו שרשום ב א & ב


a)

p1=3 p2=3 for each small trip P=6 for all trip

b)

p1=p2=6 p=12

a. The monopolist would want to choose a p1 and p2 to maximize (12-p1)p1+(12-p2)p2+(18-(p1+p2))(p1+p2)

b. With separate firms, firm 1 would choose p1 to maximize (12-p1)p1+(18-(p1+p2))p1 and firm 2 would choose p2 to maximize (12-p2)p2+(18-(p1+p2))p2.

(according to Tomer Zalmanson, Ariel Sawicki & Shaked Zin)


a) P1=P2=5 P3=10

b) P1=P2=6 P3=12

### Question 5

Students like to go to the Haifa Ball depending upon how many other students go there. Tickets cost 32 NIS each. There are 1000 students indexed by i from 1 to 1000. Student i has value vi=i. Student i has utility (in shekels) for going to the Ball of ${\displaystyle v_{i}{n \over 5000}}$, where n is the total number of students going to the Ball. (i) If everyone believes ${\displaystyle n=500}$, which students will be willing to go to the ball? (ii) What is the threshold number of tickets sold above which it will be a success and below which it will be a failure? (iii) What is the equilibrium of tickets sold if the ball is a success? (iv) What is the equilibrium of tickets sold if the ball is a failure?

(i)n=680, students that their value vi>= 320

(ii) 200

(iii) 800

(iv) 0

### Question 6

A monopoly has marginal cost of 5 and faces a demand of q=20-p. What price should he charge to maximize profits? Let us say it is a vertical market of two firms: supplier and retailer. What would the price would the supplier charge the retailer? What would be the price charged to the end consumer? If the supplier charged a franchise fee in addition to wholesale price, what would they be? Extra: Solve the above problem for the general case of marginal cost of c facing demand of q=A-p where (A>c).

1. a monopoly case: p=12.5

2. Vertical markets

  Ps=12.5
Max ProfitR= (20-q-Ps)*q
FOC: 20-2q-Ps=0 -> q= 10-Ps/2 = 3.75  -> Pc=20-3.75=16.25



3. Franchise:

  Ps=MC=5   -> q=10-Ps/2=7.5  Pc=12.5
Profit 0f retailer Pc*q-Ps*q-F= 56.25-F   -> F=56.25-E


4. General case

  Ps=(A+c)/2
q=A/4-c/4
Pc=3A/4+c/4


### Question 7

El Al and British Air are competing for passengers on the Tel Aviv- Heathrow route. Assume marginal cost is 4 and demand is Q = 18 ? P. If they choose prices simultaneously, what will be the Bertrand equilibrium? If they can collude together and fix prices, what would they charge. In practice with such competition under what conditions would you expect collusion to be strong and under what conditions would you expect it to be weak. Under what conditions should the introduction of BMI affect prices?

למישהו יש רעינות נוספים?

ANSWER: If they choose prices simultaneously, what will be the Bertrand equilibrium? p1=p2=4 - the player cut off the price till it become MC

If they can collude together and fix prices, what would they charge. p=11

p1=p2=6, P=12

## Lab report 3 questions: Bank Runs

If they value R tomorrow less than 1 today, Impatient depositors will always want to withdraw today: True or False?

For no matter what values of L and R (L<1, R>1) and any number of depositors, there will always be two equilibria in the Diamond Dybvig model: True or False

For 4 depositors (2 impatient and 2 patient), L=.6 and R=1.5 what are the payoffs for (today, today)?

For 4 depositors (2 impatient and 2 patient), L=.6 and R=1.5 what are the payoffs for (today, tomorrow)?

1. True

2. False

3. 800/800

4. 1000/500

## Lab report 4 questions: Network Externalities

If in the Network Experiment values were drawn from 0,10 and p=2.1, then what is the expected proportion of consumers buying in the success equilibrium.

.2
.3
.4
.5
.6
.7 ***
.8


If in the Network Experiment values were drawn from 0,10 and p=2.1, then what is the threshold/tipping point?

.2
.3 ***
.4
.5
.6
.7
.8


If in the Network Experiment values were drawn from 0,10, then for what prices is failure the only equilibrium?

p=2.5


Give an example of Network Externalities that wasn't mentioned in class.

## Lab report 5 questions: Vertical Market

The profit of a monopolist is higher than the upstream firm in a vertical monopoly.

True ***
False


If the upstream firm can charge a franchise fee, how much would it charge per item in addition to this fee if its marginal cost is 3

0
between 0 and 3.
3 ***
twice the marginal cost (i.e., 6). = this
other


Say demand is D=16-p and mc=0. How much would a monopolist charge? p=8

Say demand is D=16-p and mc=0. How much would the consumer pay if there is a vertical market (upstream and downstream)? Pc=12

## Lab report 6 questions: Holdup

A buyer's investment cost is C. The gains in profits is G. The supplier can raise price by R. If the buyer switches the loss is B. By what amount R (in a one shot game) will it be rational for the buyer to stay with that firm?

any R
no R.
R>G
G>R
G-C-R>B (tomer)


When will the buyer choose not to invest?

G-C-R<0 ***
G-C>0
G-B<0
G-C-B<0


Assume C=2000. Give a case of R, B, G where the subgame equilibrium is inefficient?

Assume C=2000. Give a case of R, B, G where the subgame equilibrium is efficient?

### Lab report 7 questions: Draft

If a team goes up in order of the draft (can select earlier), then

the team will always get better players
the team will never get better players
the team will sometimes get worse players ***
the team will always get the same players


Teams selecting players by a draft will

Always be Pareto Efficient
Only sometimes be Pareto Efficient ***
Never be Pareto Efficient
Can always be improved by allowing trading afterwards


If Team 1 prefers A to B to C to D (A>B>C>D) and Team 2 prefers B to C to D to A, then what are the sincere choices. 1 - AC 2 - BD

If Team 1 prefers A to B to C to D (A>B>C>D) and Team 2 prefers B to C to D to A, then what are the sophisticated choices. 1 - BA 2 - CD

## Lab report 8 questions: Subgame Perfection

In the centipede game, the subgame perfect equilibrium will be:

The first player will stop. ***
The game will continue to the end.
The game will stop just be for the end.
None of the above.


In the centipeded game, the outcome with the highest joint payoffs will be the subgame perfect equilibrium.

True
False ***


Explain why in experiments the results tend not to coincide with the subgame perfect equilibrium.

Is it benefically to be smart (and this trait known) in the centipede game?

## Lab report 9 questions: Kiyotaki Wright Model

In the model, one would never gain from trading for an object one didn't need.

True
False ***


What was the commodity money?

1***
2
3
there was none.


Explain how (at least for some parameters) there may be a speculative equilibrium.

Explain how under the parameters of the experiment, assuming that a player always would accept his desired good, a type 3 player should never accept a (2) good from a type 1 player.

## Lab report 10 questions: Signalling

A peacock's tail is an example of signalling.

True
False


In treatment 2, what is the minimum fraction of strong types needed for a pooling equilibrium?

3/4
2/3
1/2
1/3


What was the reason that Cho Kreps gave for why pooling could not occur having both types each quiche?

Give an example of signalling in the real world.

## Lab report 11 questions: Information Cascades

If you see a red ball you should always choose the cup that is color of your ball.

True
False***


If there are 10 people choosing before you and all 10 choose blue then at least 9/10 times blue would be correct choice.

True
False***


If everyone chooses rationally and there are 5 blue cups chosen out of 5 choices what are the odds that the cup is blue?

80%

מישהו יכול להסביר למה זה יוצא 80%... בבקשה

מחשבים הסתברות רק לפי שניים הראשונים כי כל השאר מפל מידע, נקבע על סמך 2 ראשונים

What is the connection between this experiment and a cascade?

## Lab report 12 questions: Rent Seeking

In a rent-seeking game, in equilibrium players make on average zero profits.

True
False***


In a rent-seeking game, in equilibrium a player's profits goes down with his marginal cost.

True
False***


What is the equilibrium effort when there are 5 players competing for $10 with marginal cost of$2? - 0.8

When the number of players goes to infinity, what is the limit of the total effort? - v/mc

## Lab report 13 questions: Taxes

A seller would prefer which of the following?

A $2 per unit tax on sellers A$2 per unit tax on buyers
depends upon the shape of the demand and supply curves
indifferent between the two options.


A buyer would prefer which of the following?

A $2 per unit tax on sellers A$2 per unit tax on buyers
depends upon the shape of the demand and supply curves
indifferent between the two options.


Buyers have valuations 10, 9, 8, 7, 5 Sellers have costs 1 4 5 6 7 what is the equilibrium price/quantity?

Buyers have valuations 10, 9, 8, 6, 5 Sellers have costs 1 4 5 6 7 what is the equilibrium price/quantity?