A tree formulation for signaling games

We provide a detailed presentation and complete analysis of the sender/receiver Lewis signaling game using a game theory extensive form, decision tree formulation. The analysis employs well established game theory ideas and concepts. We establish the existence of four perfect Bayesian equilibria in this game. We explain which equilibrium is the most likely to prevail. Our explanation provides an essential step for understanding the formation of a language convention. Further, we discuss the informational content of such signals and calibrate a more detailed definition of a true (“correct”) signal in terms of the payoffs of the sender and the receiver

The importance of reputation in the auditing of companies: A game theory analysis

Numerous, mainly empirical, studies of auditing behaviour have recently looked at the “reputation” of the auditor and the size of fees it attracts. Our model of the auditing market advances the study of the fundamental principles involved in determining behaviour in relation to the rewards and penalties using an extensive-form game of the auditing process. We set up a two-player fraud detection game with bribes, bonuses and fines faced by an auditor. Our model yields that the auditor’s reputation, reflected in the size of bonuses, is critical to establishing a non-fraudulent behaviour by the client. Hence the model confirms expected behaviour. We further find the new insight, that while the existence of penalties deters fraud by the client, their size is not critical. This is a new understanding of what determines auditor behaviour. It is the perception of a possible penalty that moves the auditor in the direction of executing a thorough investigation using his acquired expertise

A tree formulation for signaling games

The paper has as a starting point the work of the philosopher Professor D. Lewis. We provide a detailed presentation and complete analysis of the sender/receiver Lewis signaling game using a game theory extensive form, decision tree formulation. It is shown that there are a number of Bayesian equilibria. We explain which equilibrium is the most likely to prevail. Our explanation provides an essential step for understanding the formation of a language convention. The informational content of signals is discussed and it is shown that a correct action is not always the result of a truthful signal. We allow for this to be reflected in the payoff of the sender. Further, concepts and approaches from neighbouring disciplines, notably economics, suggest themselves immediately for interpreting the results of our analysis (rational expectations, self-fulfilling prophesies)

An agency relationship under general conditions of uncertainty: A game theory application to the doctor-patient interaction

The supply of information, particularly of bad news, in an agency relationship is a sensitive issue. We employ a game theory approach to investigate conflicts in the particular case of the doctor–patient relationship when information affects the emotions of patients. The doctor does not know the type of agent and the patient does not know how much information he is given. Hence, the paper obtains results when there is conflict, rather than common interest in the objectives of the two parties. The perfect Bayesian equilibrium describes beliefs and strategies which guarantee adherence to the doctor’s recommendation. We show also that the patient may non-adhere to the recommendation not only when the doctor fails to identify the patient’s needs but also if he falsely believes that the doctor has not done so

Optimal decisions in two-stage bundling

We develop a generalised framework for pure bundling where buyer tastes for two goods are assumed to follow a normal distribution. In the literature optimal bundling decisions have been considered under the assumption that the weights of the two goods are Öxed and equal. The only consideration is then to choose the proÖt maximising optimal price. Our approach is di§erent and much more realistic. The monopolist Örst decides on the optimal weights of the two goods and in the second stage derives the proÖt maximising bundle price. Welfare and policy implications of our approach are derived and comparisons are made with those of the Öxed weights approach

A Note on the Envelope Theorem

The purpose of this note is to discuss the envelope relationship between long run and short run cost functions. It compares the usually presented relationship with one of different form and implications, resulting from a simple production function and constant prices. It points out in particular that the tangency condition between the short and long run total cost functions does not necessarily hold always. The note also shows that a given value of the fixed factor might support in the long run a whole range of levels of output

Symposium on Modern Market Structure

We look at modern markets and discuss their current treatment by policy makers, analyzing policy recommendations regarding the treatment of such markets in the future. These include recommendations regarding the taxation treatment of informal markets; the presence of market power and anti-competitive strategies in health markets and platform two-sided markets; investment and arbitrage functions in foreign exchange markets; regulation and competition in the Canadian banking sector; asymmetric regulation in mobile termination charges and technological diffusion; incentive regulation in telecoms and its impact on productive efficiency; welfare enhancing government intervention recommendations in broadcasting. Finally, we give an overview of the overall success of the UK Competition Commission as a second stage enforcer of regulatory policy and competition law

A Tree Formulation for Signaling Games with Noise

The paper provides an analysis of a sender-receiver sequential signaling game. The private information of the sender is transmitted with noise by a Machine, i.e. does not always correctly reflect the state of nature. Hence, a truthful revelation by the sender of his information does not necessarily imply that the signal he sends is correct. Also, the receiver can take a correct action even if the sender transmits an incorrect signal. The payoffs of the two players depend on their combined actions. Perfect Bayesian Equilibria which can result from different degrees of noise are analysed. The Bayesian updating of probabilities is explained. The fixed point theorem which makes the connection with the idea of rational expectations in economics is calculated. Given a number of equilibria, we comment on the most credible one on the basis of the implied payoffs for both players. The equilibrium signals are an example of the formation of a language convention discussed by D. Lewis

Welfare analysis and policy implications of bundling decisions by firms

This paper models an original approach where the monopolist firm no longer uses pure bundling with weights 1:1. The decisions of the firm take place in a two-step optimisation process. In the first stage, using portfolio optimisation it decides whether to bundle and also sets the optimal weight for each good. In the second stage, it sets the profit maximising bundle price on the basis of the chosen weights. We compare the profit, consumer and welfare implications of our pure bundling model to the usual 1:1 pure bundling model, and comment on the competition policy making implications

Bundling in General Markets and in Health Care Systems

This paper provides an overview of bundling, by explaining, in general, the different forms that this practice can take in selling, buying or exchanging goods. We then proceed with a linear programming formulation in health care, to explain how the price of a bundle of resources can be calculated. We follow this by looking at the specific case of the practice of bundling by Medicare, the social insurance system for health care in the United States. We consider its advantages, disadvantages, and various recommendations