Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.
-
Upload
elfrieda-chandler -
Category
Documents
-
view
219 -
download
4
Transcript of Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.
![Page 1: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/1.jpg)
Econ 805Advanced Micro Theory 1
Dan Quint
Fall 2007
Lecture 1 – Sept 4 2007
![Page 2: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/2.jpg)
2
I’m Dan Quint, welcome to Econ 805
You are… Class website
http://www.ssc.wisc.edu/~dquint/econ805 Syllabus online, with links to papers
Lectures (no class next Thursday) Office hours
Mondays 11-12, Wednesdays 10-11, other times by appointment
Grading Problem sets (35%), final exam (65%). Midterm?
Readings I’ll try to highlight which are most important
![Page 3: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/3.jpg)
3
This class will be about auction theory
Popular auction formats Independent private values and revenue equivalence The mechanism design approach, optimal auctions The “marginal revenue” analogy, reserve prices Risk averse buyers or sellers Auctions with strong and weak bidders Interdependent values Pure common values, symmetry in asymmetric auctions Endogenous information acquisition Endogenous entry Collusion, shill bidding Sequential auctions Multi-unit auctions Other topics
![Page 4: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/4.jpg)
4
Today
Why study auctions?
Review of Bayesian games and Bayesian Nash Equilibrium
![Page 5: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/5.jpg)
5
Why study auctions?
![Page 6: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/6.jpg)
6
A whole lot of money at stake…
Christie’s and Sotheby’s art auctions – $ billions annually
Auctions for rights to natural resources (timber, oil, natural gas), government procurement, electricity markets
eBay: $52 Billion worth of goods traded in 2006 eBay itself had $6 Bn in 2006 revenues, current market cap. of $46 Bn
European 3G spectrum auctions raised over $100 Bn in 2000-2001; upcoming U.S. FCC auction expected to raise $20 Bn
U.S. treasury holds auctions for $4 TRILLION in securities annually
“Dark pools” gaining share of trade in U.S. stocks
![Page 7: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/7.jpg)
7
…and outcomes may be very sensitive to the details of the auction
One of our first results will be revenue equivalence…
…but this fails under a wide variety of conditions
Yahoo! vs. Google
Adjusting for the size of each market, revenues in European 3G auctions varied widely Over 600 € per capita in the UK and Germany 20 € per capita in Switzerland later the same year Rules in Swiss auction discouraged marginal bidders/new
entrants from participating, allowed for easy collusion among the primary competitors
![Page 8: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/8.jpg)
8
Auctions can be seen as a useful microcosm for bigger markets
“Rules of the game” and price formation are explicit, allowing for theoretical analysis
Most relevant data can be captured, allowing sharp empirical work
Auctions lend themselves to lab experiments
Results on auctions may offer insight (or intuition) into behavior in less structured markets
![Page 9: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/9.jpg)
9
Insights from auction theory may be valuable in other areas
P. Klemperer, “Why Every Economist Should Learn Some Auction Theory”: analogies in Comparison of different litigation systems “All-pay” tournaments such as lobbying, political campaigns,
patent races, and some oligopoly situations Market frenzies and crashes Online auto sales versus dealerships Monopoly pricing and price discrimination Rationing of output Patent races Value of new customers under oligopoly
![Page 10: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/10.jpg)
10
And finally,
Auction theory gives us a platform to introduce a number of important mathematical tools/techniques
Envelope theorem
Supermodularity and monotone comparative statics
Constraint simplification (necessary and sufficient conditions for equilibrium strategies)
![Page 11: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/11.jpg)
11
But with all that said…
Auctions have been a hot topic in micro theory for over 25 years
Basic theory of single-unit auctions is pretty well developed
Multi-unit auctions are less well understood Very difficult theoretically Some partial results, experimental results
![Page 12: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/12.jpg)
12
Quick Review ofGame Theory andBayesian Games
![Page 13: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/13.jpg)
13
Games of complete information
A static (simultaneous-move) game is defined by: Players 1, 2, …, N Action spaces A1, A2, …, AN
Payoff functions ui : A1 x … x AN R
all of which are assumed to be common knowledge
In dynamic games, we talk about specifying “timing,” but what we mean is information What each player knows at the time he moves Typically represented in “extensive form” (game tree)
![Page 14: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/14.jpg)
14
Solution concepts for games of complete information
Pure-strategy Nash equilibrium: s A1 x … x AN s.t.
ui(si,s-i) ui(s’i,s-i)
for all s’i Ai
for all i {1, 2, …, N}
In dynamic games, we typically focus on Subgame Perfect equilibria Profiles where Nash equilibria are also played within each
branch of the game tree Often solvable by backward induction
![Page 15: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/15.jpg)
15
Games of incomplete information
Example: Cournot competition between two firms, inverse demand is P = 100 – Q1 – Q2
Firm 1 has a cost per unit of 25, but doesn’t know whether firm 2’s cost per unit is 20 or 30
What to do when a player’s payoff function is not common knowledge?
![Page 16: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/16.jpg)
16
John Harsanyi’s big idea(“Games with Incomplete Information Played By Bayesian Players”)
Transform a game of incomplete information into a game of imperfect information – parameters of game are common knowledge, but not all players’ moves are observed Introduce a new player,
“nature,” who determines firm 2’s marginal cost
Nature randomizes; firm 2 observes nature’s move
Firm 1 doesn’t observe nature’s move, so doesn’t know firm 2’s “type”
“Nature”make 2 weak make 2 strong
Firm 2 Firm 2
Q2 Q2
Firm 1Q1 Q1
u1 = Q1(100 - Q1 - Q2 - 25)
u2 = Q2(100 - Q1 - Q2 - 30)
u1 = Q1(100 - Q1 - Q2 - 25)
u2 = Q2(100 - Q1 - Q2 - 20)
![Page 17: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/17.jpg)
17
Bayesian Nash Equilibrium
Assign probabilities to nature’s moves (common knowledge)
Firm 2’s pure strategies are maps from his “type space” {Weak, Strong} to A2 = R+
Firm 1 maximizes expected payoff in expectation over firm 2’s
types given firm 2’s equilibrium
strategy
“Nature”make 2 weak make 2 strong
Firm 2 Firm 2
Q2 Q2
Firm 1Q1 Q1
u1 = Q1(100 - Q1 - Q2 - 25)
u2 = Q2(100 - Q1 - Q2 - 30)
u1 = Q1(100 - Q1 - Q2 - 25)
u2 = Q2(100 - Q1 - Q2 - 20)
p = ½ p = ½
Q2W Q2
S
![Page 18: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/18.jpg)
18
Other players’ types can enter into a player’s payoff function In the Cournot example, this isn’t the case
Firm 2’s type affects his action, but doesn’t directly affect firm 1’s profit
In some games, it would Poker: you don’t know what cards your opponent has, but
they affect both how he’ll plays the hand and whether you’ll win at showdown
Either way, in BNE, simply maximize expected payoff given opponent’s strategy and type distribution
![Page 19: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/19.jpg)
19
Formally, for N = 2 and finite, independent types… A static Bayesian game is
A set of players 1, 2 A set of possible types T1 = {t1
1, t12, …, t1
K} and T2 = {t21, t2
2, …, t2K’} for each player,
and a probability for each type {11, …, 1
K, 21, …, 2
K’}
A set of possible actions Ai for each player
A payoff function mapping actions and types to payoffs for each player
ui : A1 x A2 x T1 x T2 R
A pure-strategy Bayesian Nash Equilibrium is a mapping si : Ti Ai for each player, such that
for each potential deviation ai Ai
for every type ti Ti
for each player i {1,2}
jkjj
kj Tt
kji
kjjii
kjTt
kji
kjjiii
kj tttsautttstsu ,),(,,),(),(
![Page 20: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/20.jpg)
20
Ex-post versus ex-ante formulations
With a finite number of types, the following are equivalent: The action si(ti) maximizes “ex-post expected payoffs” for each type
ti
The mapping si : Ti Ai maximizes “ex-ante expected payoffs” among all such mappings
I prefer the ex-post formulation for two reasons With a continuum of types, the equivalence breaks down, since
deviating to a worse action at a particular type would not change ex-ante expected payoffs
Ex-post optimality is almost always simpler to verify
jijjiiTtjijjiiiTt tttsauEtttstsuEjjjj
,),(,,),(),(
jijjiiiTtTtjijjiiiTtTt tttstsuEtttstsuEjjiijjii
,),(),(',),(),( ,,
![Page 21: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/21.jpg)
21
Going back to our Cournot example, with p = ½ that firm 2 is strong… Strong firm 2 best-responds by choosing
Q2S = arg maxq q(100-Q1-q-20)
Maximization gives Q2S = (80-Q1)/2
Weak firm 2 sets
Q2W = arg maxq q(100-Q1-q-30)
giving Q2W = (70-Q1)/2
Firm 1 maximizes expected profits:
Q1 = arg maxq ½q(100-q-Q2S-25) + ½q(100-q-Q2
W-25)
giving Q1 = (75 – Q2W/2 – Q2
S/2)/2
Solving these simultaneously gives equilibrium strategies:
Q1 = 25, (Q2W, Q2
S) = (22½ , 27½)
![Page 22: Econ 805 Advanced Micro Theory 1 Dan Quint Fall 2007 Lecture 1 – Sept 4 2007.](https://reader038.fdocuments.us/reader038/viewer/2022110103/5697bf7c1a28abf838c83cff/html5/thumbnails/22.jpg)
22
Auctions are typically modeled as Bayesian games
Players don’t know how badly the other bidders want the object Assume nature gives each bidder a valuation for the object
(or information about it) from some ex-ante probability distribution that is common knowledge
In BNE, each bidder maximizes his expected payoffs, given the type distributions of his opponents the equilibrium bidding strategies of his opponents
Thursday: some common auction formats and the baseline model