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Finite State Dynamic Games with Asymmetric Information: A Computational Framework

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  • Chaim Fershtman
  • Ariel Pakes

Abstract

We present a simple algorithm for computing an intuitive notion of MPE for ?nite state dynamic games with asymmetric information. The algorithm does not require; storage and updating of posterior distributions, explicit integration over possible future states to deter- mine continuation values, or storage and updating of information at all possible points in the state space. It is also easy to program. To il- lustrate we compute the MPE of a collusive industry in which ?rms do not know each other?s cost positions. Costs evolve with the (privately observed) outcomes of their investment decisions. Costly meetings are called when a ?rm perceives that its relative cost position has improved. The meetings reveal information and realign pro?ts accod- ingly. We show that parameters determining information ?ows can e¤ect market structure and through market structure, producer and consumer surplus.

Suggested Citation

  • Chaim Fershtman & Ariel Pakes, 2004. "Finite State Dynamic Games with Asymmetric Information: A Computational Framework," Harvard Institute of Economic Research Working Papers 2041, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:2041
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    File URL: http://www.economics.harvard.edu/pub/hier/2004/HIER2041.pdf
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    Cited by:

    1. Susan Athey & Kyle Bagwell, 2008. "Collusion With Persistent Cost Shocks," Econometrica, Econometric Society, vol. 76(3), pages 493-540, May.
    2. Allan Collard-Wexler, 2010. "Productivity Dispersion and Plant Selection in the Ready-Mix Concrete Industry," 2010 Meeting Papers 105, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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