Solution for One-Stage Bidding Game with Incomplete Information

Marina S. Sandomirskaia; Victor C. Domansky

Authors

Marina S. Sandomirskaia St.Petersburg Institute for Economics and Mathematics Russian Academy of Sciences
Victor C. Domansky St.Petersburg Institute for Economics and Mathematics Russian Academy of Sciences

Abstract

We investigate a model of one-stage bidding between two diﬀerently informed stockmarket agents for a risky asset (share). The random liquidation price of a share may take two values: the integer positive m with probability p and 0 with probability 1 − p. Player 1 (insider) is informed about the price, Player 2 is not. Both players know the probability p. Player 2 knows that Player 1 is an insider. Both players propose simultaneously their bids. The player who posts the larger bid buys one share from his opponent for this price. Any integer bids are admissible. The model is reduced to a zero-sum game with lack of information on one side. We construct the solution of this game for any p and m: we ﬁnd the optimal strategies of both players and describe recurrent mechanism for calculating the game value. The results are illustrated by means of computer simulation.

Keywords:

insider trading, asymmetric information, equalizing strategies, optimal strategies

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References

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