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Hypothesis testing equilibrium in signalling games

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  • Sun, Lan

Abstract

In this paper, we propose a definition of Hypothesis Testing Equilibrium (HTE) for general signalling games nested by an updating rule according to the Hypothesis Testing model characterized by Ortoleva (2012). In signalling games with non-Bayesian players where player 2 changes her original prior if she observes a small-probability (positive) message, an HTE may differ from a sequential Nash equilibrium because of dynamic inconsistency. However, in the case in which player 2 only treats a zero-probability message as an unexpected news, an HTE is a refinement of sequential Nash equilibrium. In Milgrom and Roberts (1982) model of limit pricing, there exists a unique HTE for each interesting case, in addition, the HTE survives the Intuitive Criterion but not vice versa.

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  • Sun, Lan, 2019. "Hypothesis testing equilibrium in signalling games," Mathematical Social Sciences, Elsevier, vol. 100(C), pages 29-34.
    • Handle: RePEc:eee:matsoc:v:100:y:2019:i:c:p:29-34
    DOI: 10.1016/j.mathsocsci.2019.05.002
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    References listed on IDEAS

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    1. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
    2. Pietro Ortoleva, 2012. "Modeling the Change of Paradigm: Non-Bayesian Reactions to Unexpected News," American Economic Review, American Economic Association, vol. 102(6), pages 2410-2436, October.
    3. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    4. Cho, In-Koo & Sobel, Joel, 1990. "Strategic stability and uniqueness in signaling games," Journal of Economic Theory, Elsevier, vol. 50(2), pages 381-413, April.
    5. Drew Fudenberg & Jean Tirole, 1983. "Sequential Bargaining with Incomplete Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(2), pages 221-247.
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    Cited by:

    1. Jeong-Yoo Kim, 2023. "Proposing New Equilibrium Concepts in Dynamic Games with Noisy Signals," Korean Economic Review, Korean Economic Association, vol. 39, pages 413-443.
    2. Zhang, Lihong & Wang, Jun & Wang, Bin, 2020. "Energy market prediction with novel long short-term memory network: Case study of energy futures index volatility," Energy, Elsevier, vol. 211(C).

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