Abstract

In this paper, we propose a definition of Hypothesis Testing Equilibrium (HTE) for general signalling games nested by an updating rule according to the Hypothesis Testing model characterized by Ortoleva (2012). In signalling games with non-Bayesian players where player 2 changes her original prior if she observes a small-probability (positive) message, an HTE may differ from a sequential Nash equilibrium because of dynamic inconsistency. However, in the case in which player 2 only treats a zero-probability message as an unexpected news, an HTE is a refinement of sequential Nash equilibrium. In Milgrom and Roberts (1982) model of limit pricing, there exists a unique HTE for each interesting case, in addition, the HTE survives the Intuitive Criterion but not vice versa.

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