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The dynamic cost of ex post incentive compatibility in repeated games of private information

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  • David A. Miller

    (UCSD)

Abstract

In a repeated game with private information, a perfect public equilibrium (PPE) can break down if communication is not necessarily simultaneous or if players can “spy” on each others’ information. An ex post perfect public equilibrium (EPPPE) is a PPE that is ex post incentive compatible in each stage game; unlike PPE, EPPPE is robust under to any communication protocol, and to spying. However, robustness comes at a cost to the players: in many games, efficient payoffs in the corresponding static mechanism design problem cannot be supported as average payoffs in an EPPPE, even when players are patient. In two- player repeated allocation games, an optimal EPPPE never employs a (static) efficient outcome function in any stage game. Instead, the players always prefer to give up some static efficiency by sometimes allocating to the player with the lower valuation. Under independent valuations, optimal equilibria are often stationary, but when valuations are globally interdependent, optimal equilibria are never stationary. Applied to the problem of collusion with hidden costs, these results yield new insights into the phenomenon of price wars in collusive equilibria.

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File URL: http://128.118.178.162/eps/game/papers/0510/0510002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 0510002.

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Length: 55 pages
Date of creation: 06 Oct 2005
Date of revision:
Handle: RePEc:wpa:wuwpga:0510002

Note: Type of Document - pdf; pages: 55
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Web page: http://128.118.178.162

Related research

Keywords: repeated games; private information; ex post incentive compatibility; price wars;

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References

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Cited by:
  1. Vinicius Carrasco & Gustavo Manso, 2006. "Syndication and Robust Collusion in Financial Markets," Textos para discussão 522, Department of Economics PUC-Rio (Brazil).
  2. Susan Athey & Ilya Segal, 2007. "An Efficient Dynamic Mechanism," Levine's Bibliography 122247000000001134, UCLA Department of Economics.
  3. Alberto Martin & Wouter Vergote, 2005. "On the role of retaliation in trade agreements," Economics Working Papers 914, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
  4. Yuliy Sannikov & Andrzej Skrzypacz, 2007. "Impossibility of Collusion under Imperfect Monitoring with Flexible Production," American Economic Review, American Economic Association, vol. 97(5), pages 1794-1823, December.
  5. Martin, Alberto & Vergote, Wouter, 2004. "Antidumping: Welfare Enhancing Retaliation?," MPRA Paper 5416, University Library of Munich, Germany.

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