Microeconomics For Dummies

Chapter 19

Understanding the Game: Credible Threats and Signals

In This Chapter

Seeking an equilibrium concept that removes non-credible threats

Finding and using an equilibrium for positive signals

One wicked problem (as we use the term in Chapter 14) is that people rarely have perfect information, particularly when making strategic decisions in a game-like situation. Sometimes information is asymmetric — one party or player knowing more than another, as discussed in Chapter 15). Sometimes a player is unable to figure out the other’s best moves because the player is unsure about the type of opponent it faces in the game. In the Prisoner’s Dilemma from Chapter 16, for instance, neither party knows what the other one will do, but infers what is in the player’s interest from their payoffs. But what if a player is unsure about the payoffs of the other player because the other player could be a good guy with one set or a bad guy with another set of payoffs?

In reality, people typically do have imperfect or limited information. In a game-like situation they don’t know entirely what the other party will do, and so they look for information to go on in order to work out the right bargain or the right move.

Suppose, for example, you’re deciding whether or not to employ someone. Taking ...