practice_problems_on_asymmetric_information教程.pdfVIP

Practice Problems on Asymmetric Information Ben Polak Econ 159a/MGT522a Dec 2007 These questions are designed to give you some practice applying ideas to do with asymmetric information. The problems are optional, for practice only, not for handing in. Most of the third problem is quite hard. The fourth problem is about auctions. I will supply answers on the web toward the end of next week. (1) Entry Deterrence (Harbaugh). Consider a two-period game. In the rst period, an incumbent monopolist sets the price for its product. In the second period a potential entrant might enter the market or might stay out. The incumbent is either low cost or high cost. The entrant does not know which: the incumbent could be low or high cost with equal probability. In the rst period, if the incumbent chooses to have a high price, it earns 200 if it is low cost or 100 if it is high cost. If it chooses a low price, it earns 150 if it is low cost or 0 if it is high cost. While it hurts prots in the rst period, setting a low price might discourage entry and boost prots in the second period. In the second period, if there is no entry, the incumbent will choose the high price and get 200 or 100 depending on its type. If there is entry, however, competition will force the incumbent to get only 50 if it is the low-cost type and only 10 if it is the high-cost type. The entrant must make an unrecoverable investment if it decides to enter the market. Its prots are -25 if the incumbent is low cost and 50 if the incumbent is high cost. The incumbent rst decides the rst-period price, then the entrant makes her decision. (a) Consider a putative separating equilibrium in which the incumbent would charge the low price in the rst period if it is the low-co