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A Course in Microeconomic Theory$
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David M. Kreps

Print publication date: 2020

Print ISBN-13: 9780691202754

Published to Princeton Scholarship Online: May 2021

DOI: 10.23943/princeton/9780691202754.001.0001

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Incomplete information and irrationality

Incomplete information and irrationality

(p.463) Chapter Thirteen Incomplete information and irrationality
A Course in Microeconomic Theory

David M. Kreps


This chapter presents a methodological innovation: the notion of a game of incomplete information. This notion has been extremely useful in the modeling of all sorts of economic phenomena. As an example of this sort of application, the chapter discusses again the problem of entry deterrence in monopoly. It uses games of incomplete information to model situations in which one or more of the players is suspected of being “irrational.” “Rationality” is meant to connote behavior that is in accord with the originally given payoffs, taking into account the predicted behavior of one's opponent(s). “Irrationality” connotes behavior that is taken without much thought of introspection. With this tool, the chapter returns to questions concerning refinements of Nash equilibrium.

Keywords:   game of incomplete information, entry deterrence, monopoly, irrationality, Nash equilibrium

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