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.