Simultaneous games with purchase of randomly supplied perfect information: Oracle Games

Abstract

We study the role of costly information in non-cooperative two-player games when an extrinsic third party information broker is introduced asymmetrically, allowing one player to obtain information about the other player's action. This broker or "oracle" is defined by a probability of response, supplying correct information randomly; the informed player can pay more for a higher probability of response. We determine the necessary and sufficient conditions for strategy profiles to be equilibria, in terms of how both players change their strategies in response to the existence of the oracle, as determined by its cost of information function. For mixed strategy equilibria, there is a continuous change as information becomes cheaper, with clear transitions occuring at critical {\it nodes} at which pure strategies become dominated (or undominated). These nodes separate distinct responses to the information for sale, alternating between regions where the paying player increases the amount of information purchased, and regions where the other player moves away from riskier strategies, in favor of safer bets that minimize losses. We derive conditions for these responses by defining a value of information.