Yves Breitmoser

Strategic reasoning in p-beauty contests

This paper analyzes strategic choice in p-beauty contests. First, I show that it is not generally a best reply to guess the expected target value, even in games with n>2 players, and that iterated best response strictly applied does not induce a choice sequence approximating pk⋅0.5. Second, I argue that the beliefs and actions of players typically considered to be level 2–4 are intuitively captured also by high-level concepts such as quantal response equilibrium and noisy introspection. Third, I analyze this hypothesis econometrically. The results concur. In six different data sets, the choices are described more adequately as mixtures of quantal response equilibrium and noisy introspection than as level-k mixtures.

On the Beliefs Off the Path: Equilibrium Refinement Due to Quantal Response and Level-K

This paper studies the relevance of equilibrium and nonequilibrium explanations of behavior, with respects to equilibrium refinement, as players gain experience. We investigate this experimentally using an incomplete information sequential move game with heterogeneous preferences and multiple perfect equilibria. Only the limit point of quantal response (the limiting logit equilibrium), and alternatively that of level-k reasoning (extensive form rationalizability), restricts beliefs off the equilibrium path. Both concepts converge to the same unique equilibrium, but the predictions differ prior to convergence. We show that with experience of repeated play in relatively constant environments, subjects approach equilibrium via the quantal response learning path. With experience spanning also across relatively novel environments, though, level-k reasoning tends to dominate.

Coalition Formation, Agenda Selection, and Power

In a wide range of political systems, decision making requires the support of a majority. When majorities are backed by coalitions, then they are organized either for a given period of time or on a case by case basis (i.e. for single proposals). In Germany, for instance, minority governments are rare and the first case prevails. In any case, there may be a unique party that is entitled to form a coalition (called formateur), or any party may be entitled to do so. We are interested in the non-cooperative treatment of a formateur model, and based on this, we want to discuss bargaining power.

Knowing me, imagining you: Projection and overbidding in auctions

People overestimate the probability that others share their values or preferences. I introduce type projection equilibrium (TPE) to capture such projection in Bayesian games. TPE allows each player to believe his opponents share his type with intermediate probability \rho. After establishing existence, I address my main question: How does projection affect behavior in games? I analyze auctions and distribution games. In auctions, projection implies an increased sense of competition, which induces overbidding in all (first-price) auctions. In addition, it biases the perceived value distribution, which induces cursed bidding in common value auctions. Thus, projection induces a hitherto neglected bias in bidding. It is novel in that it explains behavior across conditions and it is independently founded in psychology. I test projection equilibrium in multiple ways on existing data and find that it substantially improves on alternative concepts, both in isolation and in addition to them. The findings are cross-validated by testing projection of social preferences in distribution games.

Transaction Costs and Capacity Costs as Interrelated Determinants of Vertical Integration in Oligopolies

This paper considers a two-stage oligopoly model with downstream retailers and two types of transaction costs (in contracting retailers and in direct retailing). Our analysis shows how transaction costs affect vertical integration in a strategic model of oligopoly, and it relates transaction costs to other characteristics of oligopolistic industries. In particular, we show that long- and short-term capacity costs interrelate in a rather complex manner with transaction costs in determining the degree of vertical integration. Our analysis thus challenges the focus of New Institutional Economics on transaction costs. In light of the results, we finally discuss welfare implications of regulatory interventions.