EC941 - Game
Theory
Lecture 4
Prof. Francesco Squintani
Email:
[Link]@[Link]
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Structure of the Lecture
Juries and Information Aggregation
Auctions with Private Information
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Juries
In a trial, jurors are presented with
evidence on the guilt or innocence of a
defendant.
They may interpret the evidence
differently.
Each juror votes either to convict or
acquit the defendant.
A unanimous verdict is required for
conviction: the defendant is convicted if
and only if every juror votes to convict
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In deciding how to vote, each juror
considers the costs of convicting an
innocent person and of acquitting a guilty
person, on the basis of her information.
When voting, she conditions her choice on
being pivotal, i.e. changing the outcome
of the trial.
The event of being pivotal is informative:
It gives the juror information about the
private information held by the other
jurors, as this determines their votes.
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A Model of Jury Vote
Each juror comes to the trial with the
belief that the defendant is guilty with
probability .
Given the defendants status (guilty or
innocent), each juror receives a signal.
The probability that the signal is guilty
when the defendant is guilty is p, and the
probability that the signal is innocent if
the defendant is innocent is q.
Jurors are likely to interpret the evidence
correctly: 5
Each juror wishes to convict a guilty
defendant and acquit an innocent one.
Each jurors payoffs are:
z if innocent defendant convicted
(1 z) if guilty defendant acquitted.
0 if an innocent defendant is acquitted,
or if a guilty defendant is convicted.
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Let r be the probability of the defendants
guilt, given a jurors information.
Her expected payoff if the defendant is
acquitted is
r(1 z) + (1 r) 0 = r(1 z)
and her expected payoff if the defendant is
convicted is
r 0 (1 r)z = (1 r)z.
She prefers the defendant to be acquitted if
r < z, and convicted if r > z.
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Bayesian Game of Jury
Vote
Players The set of n jurors.
States The states are the set of all
profiles (X, s1, . . . , sn) where X {G, I}
and sj {g, b} for every juror j.
X = G if the defendant is guilty,
X = I if she is innocent.
si = g if player i receives the signal
guilty,
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Strategies The set of strategies of each
player is
v = {C, Q}, where C is voting to convict,
and Q is voting to acquit.
Types Each player is type consists in a
signal si together with the set of all
profiles (X, s-i), where s-i denotes is
opponents signals.
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Beliefs Type g of a player i believes that the
state is
(G, s1, . . . , sn) with probability pk1(1 p)n-k
and (I, s1, . . . , sn) with probability
(1)qk1(1 q)n-k,
where k is the number of players j
(including i) with sj=g.
Type b believes that the state is
(G, s1, . . . , sn) with probability pk(1 p)n-k-1
and (I, s1, . . . , sn) with probability (1)qn-k-
1
(1 q)k,
where k is the number of players j for
whom sj = g. 10
Payoff functions The payoff function of each
player i is:
ui(v, X) = 0 if v = (C,...,C) and X=I
or if v = (C,...,C) and X=G,
ui(v, X) = z if v = (C,...,C) and X = I
ui(v, X) =(1 z) if v = (C,...,C) and X =
G,
where X is the first component of the state,
giving the defendants true status.
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Bayesian Nash
Equilibrium
One juror Suppose there is a single juror
with signal b.
To see if she prefers conviction or
acquittal, we find the probability Pr(G|b)
that the defendants is guilty.
By the Bayes Rule:
Pr(G|b) = Pr(b|G)Pr(G)/[Pr(b|G)Pr(G)
+Pr(b|I)Pr(I)]
= (1 p) /[(1 p) + q(1 )].
The juror votes Acquittal if and only
12 if
Suppose there are n jurors.
We show that truthful voting is not a
Bayesian Equilibrium.
Suppose by contradiction that every juror
other than 1 votes truthfully (acquit if her
signal is b, convict if it is g).
Consider type b of juror 1. Her vote has no
effect on the outcome unless every other
jurors signal is g.
Hence, she votes Acquittal if the probability
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Specifically,
Pr(G|b,g,...,g) = Pr(b,g,...,g|G)Pr(G)
/[Pr(b,g,...,g|G)Pr(G)+Pr(b,g,...,g|
I)Pr(I)]
=(1 p)pn-1/[(1 p) pn-1 + q(1 q) n-1(1
)].
Hence, type b of juror 1 optimally votes for
acquittal if
z (1 p)pn-1/[(1 p)pn-1+q(1 q)n-
1
(1 )]
= 1 /{1 +q/(1 p) [(1 q )/p]n-1
(1)/}. 14
Under some conditions there is a symmetric
mixed strategy equilibrium in which each
type g juror votes for conviction, and each
type b juror randomizes.
Denote by the mixed strategy of each juror
of type b.
Each type b juror is indifferent between
voting conviction and acquittal.
Hence the mixed strategy is such that:
z = Pr(G | signal b, n1 votes for C)
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Pr(b|G)(Pr(vote C| G))n1Pr(G)
z=
Pr(b|G)(Pr(vote C|G))n1Pr(G)+Pr(b|I)(Pr(vote
C|I))n1Pr(I)
(1p)(p+(1p)) n1
(1p)(p+(1p))n1 +q(1q+q) n1
(1 )
The condition that this probability equals z
implies
(1p)(p+(1p))n1(1 z) = q(1 q +
q)n1(1 )z.
hence: = [pX (1 q)] /[ q (116 p)X],
When n is large, X is close to 1, and hence
nears 1:
a juror who interprets the evidence as
pointing to
innocence very likely nonetheless votes
for conviction.
An interesting property of this equilibrium
is that the probability that an innocent
defendant is convicted increases as n
increases: the larger the jury, the more
likely an innocent defendant is to be
convicted.
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First-Price Auctions
In a sealed-bid second price auction, the
winner pays a price equal to second-
highest bid.
In the case of complete information, this
auction is strategically equivalent to the
English auction.
In a sealed-bid first price auction, the
winner pays a price equal to her bid.
This auction is equivalent to a Dutch
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In a Dutch auction, the ask price for a
good is decreased until the one bidder
accepts to buy.
Under complete information, strategic
choices are equivalent in second-price
auctions and Dutch auctions.
Each bidder decides, before bidding
begins, the most she is willing to bid.
To win, a bidder needs to bid the highest
bid, and will pay a price equal to her bid.
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First-Price Auction Game
Players: n bidders. Bidder is valuation is
vi, we order v1> > vn > 0, without loss
of generality.
Strategies: bidder is maximal bid is bi.
Let bi = max {bj : j different from i}.
Payoffs: ui(b1, ,bn) = vi - bi if bi > bi
0 if bi < bi
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Nash Equilibrium
One N.E. is: (b*1, , b*n) = (v2, v2, , vn).
Bidder 1 wins the object, payoff: v1 - b*1 = v1
- v2 > 0.
If bidding b1 < v2, she loses the object, the
payoff is 0.
If bidding b1 > v2, her payoff is v1 - b2 < v1 -
v2 .
The payoff of bidders i = 2, , n is 0.
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There are many other Nash Equilibria.
In all equilibria, the winner has the
highest valuation.
Take any profile (b1, ..., bn) such that
player i = 1 wins.
If bi > vi, then is payoff is negative, i can
improve her payoff by bidding zero.
If bi < vi, then player 1 can increase her
payoff from zero to v1 - bi - >0 by
22 bidding
Auction and Private
Information
We use Bayesian games to model auctions
in which bidders do not know each others
valuations.
If each bidder is type is simply her
valuation vi,
we say that the bidders values are
private.
If each bidders valuation depends also on
other bidders types, we say that23 values
Second Price Auctions
with Private Values
Players: n bidders.
Types: Each bidder is type is her
valuation is vi.
Strategies: bidder is maximal bid is bi.
Payoffs: ui(b1, ,bn, v) = vi - bi if bi > bi
0 if bi < bi
where, bi = max {bj : j different from
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i}.
The profile (b*1, , b*n) = (v1, , vn) is the
unique weakly dominant solution.
Although valuations are now private
information, the unique weakly dominant
solution is the same as in the complete
information case.
The proof is entirely analogous to the case
of complete information.
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Weakly Dominant
Solution
The strategy profile (b*1, , b*n) = (v1, , vn)
is the
unique weakly dominant solution.
b < bi or bi < bi < vi
or bi > vi
bi =bi & i
wins bi=bi & i
bi < v i vi - bi 0loses 0
bi = vi vi - bi vi - bi 0
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vi < bi < bi bi > bi or
or bi =bi & i
bi < vi
bi =bi & i loses
bi = vvii - bi 0wins 0
bi > vvii - bi vi bi (< 0) 0
In sum, bidding bi = vi yields at least as high
a payoff as bidding bi > vi or bi < vi for any
opponents bids.
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First Price Auctions
with Private Values
Players: n bidders.
Types: each bidder is type is her
valuation vi.
Strategies: bidder is maximal bid is bi.
Payoffs: ui(b1, ,bn, v) = vi - bi if bi > bi
0 if bi < bi
where, bi = max {bj : j different 28from i}.
Nash Equilibrium
Say that each vi is independently drawn
from a strictly increasing and
differentiable cumulative distribution
function F, with F(v-) = 0 and F(v+) = 1.
Focus equilibria with strategies that are
differentiable, increasing in the type, and
symmetric across players.
To find the equilibrium, first find
conditions satisfied by the players
29 best
Denote the bid of type vi of player i by
(vi).
The expected payoff of a player of type v
who bids bid b when every other players
strategy is is
(v-b)Pr{All other bids < b} = (v-b)F(-
1
(b))n-1.
To find the best response when every
other players strategy is , we take the
first-order conditions 30
For (,... , ) to be a Nash equilibrium, the
bid (v) must be the best response for
every type of v, when every other player
adopts the strategy
I.e., the bid b = (v) must satisfy the
previous first order conditions.
Hence, the equilibrium condition is, for all
v:
-F(v)n-1 +(v-(v))(n-1)F(v)n-2 F(v)/(v)=0
or
F(v)n-1(v)+(v)(n-1)F(v)n-2 F(v)=v(n-
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Integrating both sides of the differential
equation,
v
F(v)n-1(v)= x(n-1)F(x)n-2 F(x) dx.
v-
Integrating by parts the right hand side,
v
F(v)n-1(v) = - F(x)n-1 dx + vF(v)n-1.
v-
We verify that (v) is increasing: (,,)
is B.N.E.,
v
(v) = v- F(x)n-1 dx/F(v)n-1. 32
Revenue Equivalence
Suppose that n risk neutral bidders
compete in a sealed-bid auction, in which
the highest bidder wins the good.
(These auctions include first-price
auctions, second-
price auctions, all-pay auctions, etc.).
Suppose that each bidder independently
receives a signal from the same
continuous and increasing cumulative
distribution, and has a valuation that
depends continuously on all the 33bidders
Consider any symmetric Nash equilibrium
with differentiable, increasing strategies,
and such that the expected payoff of a
bidder with the lowest possible valuation
is zero.
Given the opponents equilibrium
strategies, each players bid affects her
winning probability p and expected
equilibrium payment e(p).
So, we can think of each bidders
equilibrium bid choice as just choosing a
value of p. 34
The problem of a bidder with valuation v
is:
maxp pv - e(p)
Let the solution be p*(v), the first-order
condition gives
v = e(p*(v)) for all v.
Integrating both sides of this equation, we
have
v
e(p*(v)) = e(p*(v-)) + x dp*(x).
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Because the good is sold to the bidder
with the highest valuation,
p*(v) = Pr{vj < v, for n-1 bidders j}=
Pr(X<v),
where X is the highest of n-1 independent
valuations.
The probability of winning is independent
of the
detailed rules of the auction.
Because the expected payoff of a bidder
with valuation v- is zero, e(p*(v-)) = 0;
hence, the expected payment of36any
We obtain the following result.
Theorem (Revenue Equivalence Principle).
Suppose that each bidder (i) is risk neutral,
(ii) independently receives a signal from the
same continuous and increasing cumulative
distribution, and (iii) has a valuation that
depends continuously on all the bidders
signals. Consider auctions in which the
highest bidder wins the good. Consider any
symmetric Nash equilibrium with increasing
strategies, and such that the expected
payoff of a bidder with the lowest possible
valuation is zero. The expected payment
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of
Summary of the Lecture
Juries and Information Aggregation
Auctions with Private Information
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Preview of the Next
Lecture
Definition of Extensive-Form Games
Subgame Perfection and Backward
Induction
Applications: Stackelberg Duopoly, Harris-
Vickers Race.
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