PUB - Publikationen an der Universität Bielefeld

Essays on Two-player Games with Asymmetric Information
This thesis contributes to the economic theory literature in three aspects: price dynamics in financial markets with asymmetric information, belief updating and equilibrium refinements in signalling games, and introducing ambiguity in limit pricing theory.
In chapter 2, we formulate a zero-sum trading game between a better informed sector and a less informed sector to endogenously determine the underlying price dynamics. In this model, player 1 is informed of the state (L) but is uncertain about player 2's belief about the state, because player 2 is informed through some message (M) related to the state. If L and M are independent, then the price process will be a Continuous Martingale of Maximal Variation (CMMV), and player 1 can benefit from his informational advantage. However, if L and M are not independent, player 1 will not reveal his information during the trading process, therefore, he does not benefit from his informational advantage.
In chapter 3, I propose a definition of Hypothesis Testing Equilibrium (HTE) for general signalling games with non-Bayesian players nested by an updating rule according to the Hypothesis Testing model characterized by Ortoleva (2012). An HTE may differ from a sequential Nash equilibrium because of dynamic inconsistency. However, in the case in which player 2 only treats a zeroprobability message as an unexpected news, an HTE is a refinement of sequential Nash equilibrium and survives the Intuitive Criterion in general signalling games but not vice versa. We provide an existence theorem covering a broad class of signalling games often studied in economics.
In chapter 4, I introduce ambiguity in a standard industry organization model, in which the established firm is either informed of the true state of aggregate demand or is under classical measurable uncertainty about the state, while the potential entrant is under Knightian uncertainty (ambiguity) about the state. I characterize the conditions under which limit pricing emerges in equilibria, and thus ambiguity decreases the probability of entry. Welfare analysis shows that limit pricing is more harmful in a market with higher expected demand than in a market with lower expected demand.