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Modeling Competitive Behavior

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  • Daniel R. Vincent

Abstract

A single seller of an indivisible object wishes to sell the good to one of many buyers. The seller has zero value for the good; the buyers have a commonly known identical value of one. This paper attempts to determine strategic environments, which ensure the seller's ability to exploit the competitive behavior of the buyers to extract all the surplus in the game. It is shown that in many simple dynamic games, there are subgame perfect equilibria, which involve the seller giving up the good for free. Even if the seller has an informational advantage which allows him to keep bidders from learning the bidding behavior of their opponents, there still exist (perfect Bayesian) equilibria which involve a sale at the price of zero. However, in this case, a simple refinement in the spirit of sequential equilbria can be used to rule out such collusive behavior in the spirit of sequential equilibria can be used to rule out such collusive behavior and to show that the unique equlibrium outcome satisfying this refinement involve a price of one.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 893.

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Date of creation: Apr 1990
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Handle: RePEc:nwu:cmsems:893

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  1. Aumann, Robert J, 1987. "Correlated Equilibrium as an Expression of Bayesian Rationality," Econometrica, Econometric Society, vol. 55(1), pages 1-18, January.
  2. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  3. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  4. Lawrence Ausubel & Raymond Deneckere, 1985. "One is Almost Enough for Monopoly," Discussion Papers 669, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July.
  6. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, vol. 54(3), pages 533-54, May.
  7. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 173-91, April.
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