Beer or Quiche

Beer or Quiche game
In this handout, we discuss signaling games of Beer or Quiche type and the way to find the plausible
outcome of this type of games – weak perfect Bayesian equilibrium.
The basic idea is that we try all the combinations of actions of all players one by one see if any of them is
an equilibrium. In general, we work in the following steps:
Step 1: Start with actions of Player 1 (both types)

Step 2: Find Player 2’s beliefs based on actions of Player 1 (in both information sets)
Step 3: Find optimal response of Player 2 (in both information sets)
Step 4: Check if both types of Player 1 play optimal response:
a. yes, no type of Player 1 wants to deviate => we have WPBE
b. no, at least one type of Player 1 wants to deviate => no WPBE
Step 5: Move to the next possible actions of Player 1
Example: consider the following game.
We will analyze these options:
1. Player 1: Beer if Weak, Quiche if Strong (Separating equilibrium 1)

2. Player 1: Quiche if Weak, Beer if Strong (Separating equilibrium 2)
3. Player 1: Quiche if Weak, Quiche if Strong (Pooling equilibrium 1)
4. Player 1: Beer if Weak, Beer if Strong (Pooling equilibrium 2)
Option 1: Player 1: Beer if Weak, Quiche if Strong (Separating equilibrium 1)

Beer if Weak, Quiche if Strong
Information sets are reached, so beliefs are calculated based on actions of Player 1.

In the left information set, Player 1 knows that Player 2 is of Weak type and Fighting is optimal (3>0).
In the right information set, Player 2 knows that Player 1 is of Strong type and Not Fighting is optimal
(2>0).
Step 4: Check if both types of Player 1 play optimal response
Weak type of Player 1 is satisfied, but Strong type of Player 1 wants to deviate and get higher profit.
So this is not WPBE.
Option 2: Player 1: Quiche if Weak, Beer if Strong (Separating equilibrium 2)

Quiche if Weak, Beer if Strong
Information sets are reached, so beliefs are calculated based on actions of Player 1.
In the left information set, Player 1 knows that Player 2 is of Strong type and Fighting is optima (4>1).
In the right information set, Player 2 knows that Player 1 is of Weak type and Fighting is optimal
(1>0).

No type of Player 1 wants to deviate because the payoff would be lower. So this is WPBE.
Option 3: Player 1: Quiche if Weak, Quiche if Strong (Pooling equilibrium 1)

Quiche if Weak, Quiche if Strong
Right information set is reached, so beliefs are calculated based on actions of Player 1. Left
information set is not reached, so we are free to choose any beliefs, any set of beliefs is consistent
with Player 1’s actions. Denote beliefs p and 1-p.
In the right information set, Player 2 calculates expected payoff of playing Fight and NotFigt:
EP(Fight) = 0.3*1+0.7*0 = 0.3
EP(NotFight) = 0.3*0+0.7*2 = 1.4
So NotFight is optimal response.
In the left information set, optimal response of Player 2 generally depends on value of p (beliefs).
However, in this case, Fight dominates NotFight in the left information set and hence Fight is
optimal.

Actually, no matter what action Player 2 chooses in the left information set, Weak type of Player 1
will always want to deviate. So this is not WPBE.

Option 4: Player 1: Beer if Weak, Beer if Strong (Pooling equilibrium 2)
Beer if Weak, Beer if Strong
Left information set is reached, so beliefs are calculated based on actions of Player 1. Beliefs in the
right information set are denoted p and 1-p because this information set is not reached and hence
any set of beliefs is consistent with actions of P1..

In the left information set, Player 2 calculates expected payoff of playing Fight and NotFigt:
EP(Fight) = 0.3*3+0.7*4 = 3.7
EP(NotFight) = 0.3*0+0.7*1 = 0.7
So Fight is optimal response.
In the right information set, optimal response of Player 2 generally depends on value of p (beliefs).
There are two options, either the optimal response is Fight, but then Weak Player 1 would want to
deviate; or the optimal response is NotFight. In this case no type of Player 1 would want to deviate.
So the beliefs have to be set such that expected payoff from NotFight is larger than from Fight.
EP(Fight) < EP(NotFight) => 1*p + 0*(1-p) < 0*p + 2*(1-p) => p<2/3
No type of Player 1 wants to deviate because the payoff would be lower. So this is WPBE.
Step 5: Move to the next possible actions of Player 1. There are no more possibilities.
There are two WPBE in this game:

1. Weak P1 – Quiche, Strong P1 – Beer; P2 Fight if Beer and Fight if Quiche and p=0 in the left
information set and p=1 in the right information set.
2. Weak P1 – Beer, Strong P1 – Beer; P2 – Fight if Beer and NotFight if Quiche and p<2/3.

Beer or Quiche

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Beer or Quiche game

Step 1: Start with actions of Player 1 (both types)

Example: consider the following game.

We will analyze these options:

1. Player 1: Beer if Weak, Quiche if Strong (Separating equilibrium 1)

Step 1: Start with actions of Player 1 (both types)

Step 3: Find optimal response of Player 2 (in both information sets)

Step 5: Move to the next possible actions of Player 1

Option 2: Player 1: Quiche if Weak, Beer if Strong (Separating equilibrium 2)

Step 4: Check if both types of Player 1 play optimal response

Step 5: Move to the next possible actions of Player 1

Option 3: Player 1: Quiche if Weak, Quiche if Strong (Pooling equilibrium 1)

Step 4: Check if both types of Player 1 play optimal response

Step 5: Move to the next possible actions of Player 1

Step 3: Find optimal response of Player 2 (in both information sets)

There are two WPBE in this game:

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