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Finite State Dynamic Games with Asymmetric Information: A Framework for Applied Work

Author

Listed:
  • Ariel Pakes

    (Harvard University)

  • Chaim Fershtman

    (Tel Aviv University)

Abstract

We present a framework for the applied analysis of dynamic games with asymmetric information. The framework consists of a definition of equilibrium, and an algorithm to compute it. Our definition of Applied Markov Perfect equilibrium is an extension of the definition of Markov Perfect equilibrium for games with asymmetric information; an extension chosen for its usefulness to applied research. Each agent conditions its strategy on the payoff or informationally relevant variables that are observed by that particular agent. The strategies are optimal given the beliefs on the evolution of these observed variables, and the rules governing the evolution of the observables are consistent with the equilibrium strategies. We then provide a simple algorithm for computing this equilibrium. The algorithm is easy to program and does not require computation of posterior distributions, explicit integration over possible future states, or information from all possible points in the state space. For specificity, we present our results in the context of a dynamic oligopoly game with collusion in which the outcome of firms? investments are random and only observed by the investing agent. We then use this example to illustrate the computational properties of the algorithm.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Ariel Pakes & Chaim Fershtman, 2009. "Finite State Dynamic Games with Asymmetric Information: A Framework for Applied Work," 2009 Meeting Papers 209, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:209
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    Cited by:

    1. Weintraub, Gabriel Y. & Benkard, C. Lanier & Van Roy, Benjamin, 2007. "Computational Methods for Oblivious Equilibrium," Research Papers 1969, Stanford University, Graduate School of Business.
    2. Weintraub, Gabriel Y. & Benkard, C. Lanier & Van Roy, Benjamin, 2007. "Markov Perfect Industry Dynamics with Many Firms," Research Papers 1919r, Stanford University, Graduate School of Business.
    3. Bernard Caillaud & Romain de Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," Working Papers halshs-00622291, HAL.
    4. Lewis, Greg & Backus, Matthew, 2009. "An Estimable Demand System for a Large Auction Platform Market," Department of Economics, Working Paper Series qt8vk5j2kr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    5. Bernard Caillaud & Romain de Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," PSE Working Papers halshs-00622291, HAL.
    6. Bernard Caillaud & Romain De Nijs, 2014. "Strategic Loyalty Reward in Dynamic Price Discrimination," Marketing Science, INFORMS, vol. 33(5), pages 725-742, September.
    7. Mar Reguant, 2014. "Complementary Bidding Mechanisms and Startup Costs in Electricity Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1708-1742.
    8. Luís Cabral, 2005. "Collusion Theory: Where to Go Next?," Journal of Industry, Competition and Trade, Springer, vol. 5(3), pages 199-206, December.
    9. Patrick Bajari & Victor Chernozhukov & Han Hong & Denis Nekipelov, 2015. "Identification and Efficient Semiparametric Estimation of a Dynamic Discrete Game," NBER Working Papers 21125, National Bureau of Economic Research, Inc.
    10. Gabriel Y. Weintraub & C. Lanier Benkard & Benjamin Van Roy, 2010. "Computational Methods for Oblivious Equilibrium," Operations Research, INFORMS, vol. 58(4-part-2), pages 1247-1265, August.
    11. Ariel Pakes, 2008. "Theory and Empirical Work on Imperfectly Competitive Markets," NBER Working Papers 14117, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • 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
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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