Equilibrium Selection in Auctions and High Stakes Games
Econometrica · 2018 · Volume 86 · Issue 1
Abstract
We introduce thetest-set equilibriumrefinement of Nash equilibrium to formalize the idea that players contemplate only deviations from equilibrium play in which a single competitor plays a non-equilibrium best response. We then apply this refinement to three well-known auction games, comparing our findings to similar ones previously obtained by specialized equilibrium selections. We also introduce a theory of high stakes versions of games, in which strategies are first proposed and then subjected to a potentially costly review-and-revise process. We demonstrate a sense in which the test-set equilibria emerge from such processes when the cost of revision is small.
Keywords
Equilibrium refinement, test-set equilibrium, quasi-perfect equilibrium, menu auction, generalized second-price auction, second-price common value auction
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