Week 2 - Information and Reputation in Markets

Question 1

What are the 3 conditions for a Perfect Bayesian Equilibrium

Answer 1

• Best Response:
• Each player must be optimal at every information set, given their beliefs
• Correct beliefs:
• If something can actually happen during the game, then beliefs about it must be updated using Bayes’ rule
  -Reasonable Beliefs:
• If something doesn’t happen in equilibrium, beliefs can be anything, but if Bayes’ Rule can be used, it must be used

Question 2

Pooling equilibrium Vs Separating Equilibrium

Answer 2

Pooling Equilibrium: all types do the same thing (cant distinguish types)
Separating Equilibrium: all types do different things (reveals their type)