Perfect Bayesian Equilibrium
Economics 302 - Microeconomic Theory II: Strategic Behavior
Instructor: Songzi Du
Simon Fraser University
March 30, 2015
ECON 302 (SFU)
Lecture 12
March 30, 2015
1 / 14
Perfect Bayesian Equilibrium
Fix an extensive-form game.
Conditional belief on an information set: probabilities over nodes in
the information set.
ECON 302 (SFU)
Lecture 12
March 30, 2015
2 / 14
Perfect Bayesian Equilibrium
Fix an extensive-form game.
Conditional belief on an information set: probabilities over nodes in
the information set.
A Perfect Bayesian Equilibrium is a strategy profile and a system of
conditional beliefs such that
1. (Sequential Rationality) for every player, at every information set,
the players strategy is a best response given the strategies of others
and his conditional belief at that information set.
2. (Consistency) the system of conditional beliefs is derived from the
strategy profile following Bayes Rule whenever possible.
Subgame perfect equilibrium + Bayes Rule
ECON 302 (SFU)
Lecture 12
March 30, 2015
2 / 14
Beer-Quiche game
ECON 302 (SFU)
Lecture 12
March 30, 2015
3 / 14
Used Car Game: seller proposes
ECON 302 (SFU)
Lecture 12
March 30, 2015
4 / 14
Education as Signal
Players: high type student, low type student, and a firm.
The student, high or low type, chooses whether or not to go to
University. The firm observes this choice of education, and decides to
hire the student or not.
The firm cannot tell if the student is high or low type, believes that
the student is high type with probability 0.5.
ECON 302 (SFU)
Lecture 12
March 30, 2015
5 / 14
Education as Signal
Players: high type student, low type student, and a firm.
The student, high or low type, chooses whether or not to go to
University. The firm observes this choice of education, and decides to
hire the student or not.
The firm cannot tell if the student is high or low type, believes that
the student is high type with probability 0.5.
The firm gets 1 he hires the high type student, -1 if he hires the low
type student, 0 if not hiring.
ECON 302 (SFU)
Lecture 12
March 30, 2015
5 / 14
Education as Signal
Players: high type student, low type student, and a firm.
The student, high or low type, chooses whether or not to go to
University. The firm observes this choice of education, and decides to
hire the student or not.
The firm cannot tell if the student is high or low type, believes that
the student is high type with probability 0.5.
The firm gets 1 he hires the high type student, -1 if he hires the low
type student, 0 if not hiring.
The high type student prefers university; the low type student prefers
leisure (no university). The student, high or low type, gets 1 if hired,
0 otherwise; and an additional 10 if he follows his preferred
educational choice.
ECON 302 (SFU)
Lecture 12
March 30, 2015
5 / 14
Education as Signal
ECON 302 (SFU)
Lecture 12
March 30, 2015
6 / 14
Battle of the Sexes with an Outside Option: Game I
ECON 302 (SFU)
Lecture 12
March 30, 2015
7 / 14
Battle of the Sexes with an Outside Option: Game II
ECON 302 (SFU)
Lecture 12
March 30, 2015
8 / 14
Battle of the Sexes with an Outside Option: Game III
ECON 302 (SFU)
Lecture 12
March 30, 2015
9 / 14
Summary on Battle of the Sexes with an Outside Option
The three games have the same set of strategies for both players. In
Game II and III, player 1 has a chance to reconsider about opting In
for the date.
In Game I, three PBEs: #1 (In, B; B), #2 (Out, H; H), #3 (Out,
5/7B+2/7H; 2/7B + 5/7H).
#1 remains PBE in Game II, #2 and #3 not PBE in Game II
#1 and #2 remain PBE in Game III, #3 not PBE in Game III
Equilibrium #1 is more robust than #2 and #3. Equilibrium #1 is
invariant to the precise presentation of extensive form.
In equilibrium #1 (and not in #2 and #3), player 2 treats player 1
opting In not as a random mistake, but as a signal for her intention of
playing B. This is known as forward induction.
ECON 302 (SFU)
Lecture 12
March 30, 2015
10 / 14
Poker with Two Cards (Watson, 2013)
Two cards: Ace and King, randomly dealt to player 1 (with 50-50
probability). The card is player 1s private information (type). Player
2 does not receive a card.
Player 1 chooses first to bid or fold; if he folds, player 1 loses his ante
of $1 to player 2.
If player 1 bids, then player 2 chooses to bid or fold; if he folds, player
2 loses his ante of $1 to player 1.
If both bid, the ante is raised to $b, player 1 wins $b if he has Ace
and loses $b if he has King. (b is an exogenous parameter.)
ECON 302 (SFU)
Lecture 12
March 30, 2015
11 / 14
Poker with Two Cards (b = 2)
ECON 302 (SFU)
Lecture 12
March 30, 2015
12 / 14
Poker with Three Cards (Watson, 2013)
Three cards: Ace, King and Queen, one card is randomly dealt to
player 1, and one card is randomly dealt to player 2. The card is a
players private information (type).
Player 1 chooses first to bid or fold; if he folds, player 1 loses his ante
of $1 to player 2.
If player 1 bids, then player 2 chooses to bid or fold; if he folds, player
2 loses his ante of $1 to player 1.
If both bid, the ante is raised to $b, the cards are revealed, and the
lower card player loses $b to the higher card player. (Ace > King >
Queen)
ECON 302 (SFU)
Lecture 12
March 30, 2015
13 / 14
Poker with Three Cards (b = 2)
ECON 302 (SFU)
Lecture 12
March 30, 2015
14 / 14
