Microeconomic Theory by Susheng Wang

Author:Susheng Wang
Language: eng
Format: epub, pdf
Publisher: Springer Singapore, Singapore

The unreasonable SPNE is ruled out.

The reason that the BE concept can solve the above problem is that a belief system gives us the opportunity to derive an equilibrium backward one step at a time. A SPNE only allows us to derive backward one subgame at a time, and this backward approach does not apply within a subgame. A subgame itself may contain some unreasonable NEs, as shown in Example 7.19. A belief system allows us to solve the game in two steps, instead of in one step.

Example 7.25

Let us find BEs for the game in Fig. 20 from Example 7.22. By the SR solution in (11), condition (a) in Definition 7.16 is already satisfied. For condition (b), consistency can be satisfied only when . That is, we find one and only one BE:

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