Econometrica: Jan 2018, Volume 86, Issue 1
Equilibrium Selection in Auctions and High Stakes Games
Paul Milgrom, Joshua Mollner
We introduce the test-set equilibrium refinement 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.
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Supplement to "Equilibrium Selection in Auctions and High Stakes Games"
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