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Correlation of Types in Bayesian Games

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  • Luciano De Castro
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    Abstract

    Despite their importance, games with incomplete information and dependent types are poorly understood; only special cases have been considered and a general approach is not yet available. In this paper, we propose a new condition (named richness) for correlation of types in (asymmetric) Bayesian games. Richness is related to the idea that “beliefs do not determine preferences” and that types should be modeled with two explicit parts: one for payoffs and another for beliefs. With this condition, we are able to provide the first pure strategy equilibrium existence result for a general model of multi-unit auctions with correlated types. We then focus on a special case of richness, called “grid distributions,” and establish necessary and sufficient conditions for the existence of a symmetric monotonic pure strategy equilibrium in first-price auctions with general levels of correlation. We also provide a polynomial-time algorithm to verify this existence and suggest, using simulations, that the revenue superiority of English auctions may not hold for positively correlated types in general. JEL Classification Numbers: C62, C72, D44, D82

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    Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1556.

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    Date of creation: 01 Jul 2012
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    Handle: RePEc:nwu:cmsems:1556

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    18. Philip J. Reny, 1999. "On the Existence of Pure and Mixed Strategy Nash Equilibria in Discontinuous Games," Econometrica, Econometric Society, vol. 67(5), pages 1029-1056, September.
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