Finite State Dynamic Games with Asymmetric Information: A Computational Framework
48 Pages Posted: 29 Jul 2004
Date Written: August 2004
We present a simple algorithm for computing an intuitive notion of MPE for finite state dynamic games with asymmetric information. The algorithm does not require: storage and updating of posterior distributions, explicit integration over possible future states to determine continuation values, or storage and updating of information at all possible points in the state space. It is also easy to program. To illustrate we compute the MPE of a collusive industry in which firms do not know each other's cost positions. Costs evolve with the (privately observed) outcomes of their investment decisions. Costly meetings are called when a firm perceives that its relative cost position has improved. The meetings reveal information and realign profits according. We show that parameters determining information flows can effect market structure and through market structure, producer and consumer surplus.
Keywords: Dynamic Games, Asymmetric Information, Cartel, Numerical Analysis
JEL Classification: C73, C72, L13, L40
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