Ambiguity and Social Interaction.
Paper number: 05/04
Paper date: 27th October 2004
Paper Category: Working Paper
Jurgen Eichberger, David Kelsey and Burkhard C. Schipper
We present a non-technical account of ambiguity in strategic games and show how it may be applied to economics and social sciences. Optimistic and pessimistic responses to ambiguity are formally modelled. We show that pessimism has the eﬀect of increasing (decreasing) equilibrium prices under Cournot (Bertrand) competition. In addition the eﬀects of ambiguity on peace-making are examined. It is shown that ambiguity may select equilibria in coordination games with multiple equilibria. Some comparative statics results are derived for the impact of ambiguity in games with strategic complements.