Distributional Perfect Equilibrium in Bayesian Games with Applications to Auctions

Economics

Further details

In second-price auctions with interdependent values, bidders do not necessarily have dominant strategies. Moreover, such auctions may have many equilibria. To use the concept of trembling hand perfect equilibrium as a tool to rule out the less intuitive equilibria, we  define the notion of distributional perfect equilibrium for Bayesian games with infinite type and action spaces. We prove that every Bayesian game has a distributional perfect equilibrium if the information structure of the game is absolutely continuous and the payoffs are equicontinuous. We apply distributional perfection to a class of symmetric second-price auctions with interdependent values and observe that a specific type of equilibrium is perfect, while many of less intuitive equilibria are not.