Games of incomplete information:

Game of incomplete  information constitutes a  large part of  the game theory with which many new concepts and their applications make this kind of game attractive and useful. As  compare to game of complete  information, game ,of incomplete information  is more realistic and widely used.  It  is trivial that the concept of equilibrium  in  these two games  is different due to  their different characteristics.  In  this  unit,  we  illustrate different concepts of  equilibrium under the game of incomplete information and their application. In this regard, we will begin with explaining the concept of Bayesian Nash equilibrium. The second  kind of  equilibrium  that  we  will  discuss  is  the concept of  Perfect Bayesian Nash equilibrium. Perfect Bayesian Nash  equilibrium  is one of the refinements of the Bayesian Nash Equilibrium. We will solve some problems that deal with both Bayesian Nash equilibrium and Perfect  Bayesian Nash equilibrium. Next, we discuss the signaling game, where there  is a  firm  that sends some signal  to another  about her  type and receiving that  signal  other firm  will  react. As we will see under  this kind of game one should have the same notion of equilibrium. Lastly, we will  going to discuss the concept and reasoning for entry deterrence by  a firm with monopoly power and due to that can influence  the market price  by  its own action. One should remember that firm having monopoly power not always deter entry of the  new  comers.  It depends on  the profit after the action taken by  the incumbent firm,  i.e.,  if the incumbent firm knows that if she deters entry of the potential new  comer, her profit will  be  more  in  the  post-entry  period in  an oligopoly game; the incumbent firm will  reduce her price  in  such a way  that the market become non-profitable to the potential entrant. On  the other hand,  if  the profit of the incumbent firm  is less when entry is deterred and more  if  she allows then she never deters entry. Basically,  firm's  objective is to maximise  its own profit.

Therefore, it will take that action which maximises her profit and that may or may not deter entry of the potential new  comer. We will consider this kind of situation as a two period normal form game of complete information.