Choose
To maximize1
Uncertainty
from2
Competitive Market with Full Information (ECON 201/301)
Buyers
Consumption
Utility
(No uncertainty)
bundle
Sellers
Quantity
Profit
(No uncertainty)
Taking as given
Result
Budget constraint
Demand curve
Cost function3,
Price
Supply curve
Competitive Market where Sellers Have Additional Information about Good
Buyers
Consumption
Expected
Problem’s setup
Budget constraint
bundle4
utility (EU)
and sellers’
behaviour
3
Sellers
Quantity
Profit
(No uncertainty)
Cost function ,
Price
Monopoly
Buyers
Consumption
Utility
(No uncertainty)
Budget constraint
bundle
3
Seller
Quantity
Profit
(No uncertainty)
Cost function ,
(equivalently,
Demand curve
price)5
Game
Players
Strategy
EU6 in the
Other players’
Other players’
game
strategies
strategies
6
Players
Strategy
Other players’
Other players’
EU in every
strategies
strategies
subgame
Signaling Game
Player 1
Strategy (each
EU (just util.
(No uncertainty
Player 2’s strategy,
(signal sender) type decides
if pl. 2 plays
if player 2 plays
Signal’s cost
whether to signal) pure strategy) pure strategy)
Player 2
Strategy (what to
EU
Beliefs, which
Player 1’s strategy
(signal
do if signal and if
are from
observer)
no signal; usually
problem’s setup
assumed pure)
& pl. 1’s strategy
Principal-Agent Problem (e.g. moral hazard, second-degree price discrimination)
Agent
Strategy (usually
EU
Problem’s setup
Outside option,
assumed pure)
Contract offered by
the principal
Principal
Contract (e.g.
EU7
Problem’s setup
Agent’s IR
wage/effort or
constraint8
price/qty pair)
7
Principal
Contract (e.g.
Problem’s setup
Agent’s IR and IC
EU
8
wage/outcome or
constraints
price/qty pairs)
1
Potentially,
adverse selection
Demand curve
Monopoly
outcome
Nash equilibrium
Subgame-perfect
equilibrium
Signaling
equilibrium
(pooling,
separating or
semi-separating)
IR, IC constraints
Principal’s firstbest outcome
Principal’s
second-best
outcome
As usual, this document assumes that firms are risk-neutral, which means that they maximize (expected) profit.
In other words, this is where the probabilities for writing down expected utility/profit come from.
3
As you’ve learned in ECON 201/301, the cost function comes from choosing the cost-minimizing input mix.
4
In class, we have assumed quasilinear utility and unit demand (i.e. buyer only values first unit of the good).
5
Can set different quantities/prices for different consumers or groups thereof when consumers are identifiable (firstdegree and third-degree price discrimination); can also use more sophisticated pricing schemes, such as bundling
and two-part tariffs.
6
When players are firms, as when studying oligopoly, this is expected profit.
7
When the principal is a firm, as is often the case, this is expected profit.
8
When the agent has multiple possible types (e.g. second-degree price discrimination), each type has an IR
constraint and, for the second best, an IC constraint.
2