Ambiguity in Multi-Stage Games: Uncertainty about the Opponent's Strategic Behaviour

We propose Consistent-Planning Equilibrium under Ambiguity (CP-EUA), a solution concept for two-player multi-stage games with almost perfect information. Players evaluate continuation payoffs using a neo-additive representation centred on a behavioural-strategy theory of the opponent. The additive component is identified with the opponent’s behavioural strategy, while the ambiguity component captures the player’s lack of confidence in that theory. The lack-of-confidence parameter is revised by Generalized Bayesian Updating (GBU). Players take account of possible changes in their future ambiguity-sensitive evaluations by using consistent planning. We show that, in the centipede game, ambiguity about the opponent’s strategic behaviour together with sufficient optimism can sustain cooperation for many periods. Similarly, in a non-cooperative bargaining game, ambiguity and optimism may generate delay before agreement is reached.