Perfect information

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Perfect information is a term used in economics and game theory to describe a state of complete knowledge about the actions of other players that is instantaneously updated as new information arises.

Chess is the canonical example of a game with perfect information, in contrast to, for example, the prisoner's dilemma.

In microeconomics, a state of perfect information is required for perfect competition. That is, assuming that all agents are rational and have perfect information, they will choose the best products, and the market will reward those who make the best products with higher sales. Perfect information would practically mean that all consumers know all things, about all products, at all times, and therefore always make the best decision regarding purchase. In competitive markets, unlike game-theoretic models, perfect competition does not require that agents have complete knowledge about the actions of others; all relevant information is reflected in prices.

It is law of sociology that perfect information does not exist, and cannot totally exist, due to the presence of deception. For example, a crooked used-car salesman could sell a consumer a car that he knew was only going to last another 1000 miles, as a car that will last much longer. He as the seller has an advantage against the consumer. This knowledge of asymmetric information, as the consumer does not have as good information about the cars as the seller does, can also lead the consumer to assume that the cars are in general of poor quality. This will again give the seller an incentive not to sell high quality cars as the consumer will have no way of knowing that the car is of higher quality, and thus not be willing to pay a higher price for the car. Sellers can attempt to differentiate themselves from other providers by various guarantees, offers and independent assessments.

Advertising serves two roles. Firstly, it allows producers to increase the amount of available information by providing consumers with more information about their products. Furthermore, it allows producers to use a lack of perfect information to counter product deficiencies by way of advertisement. In theory, the more information that exists about products, the more "free" a market is. In practice, it is also the quality of the information that counts.

[edit] See also

[edit] References

  • Fudenberg, D. and Tirole, J. (1993) Game Theory, MIT Press. (see Chapter 3, sect 2.2)
  • Gibbons, R. (1992) A primer in game theory, Harvester-Wheatsheaf. (see Chapter 2)
  • Luce, R.D. and Raiffa, H. (1957) Games and Decisions: Introduction and Critical Survey, Wiley & Sons (see Chapter 3, section 2)


 view  Topics in game theory

Definitions

Normal form game · Extensive form game · Cooperative game · Information set · Preference

Equilibrium concepts

Nash equilibrium · Subgame perfection · Bayes-Nash · Trembling hand · Correlated equilibrium · Sequential equilibrium · Quasi-perfect equilibrium · Evolutionarily stable strategy

Strategies

Dominant strategies · Mixed strategy · Grim trigger · Tit for Tat

Classes of games

Symmetric game · Perfect information · Dynamic game · Repeated game · Signaling game · Cheap talk · Zero-sum game · Mechanism design

Games

Prisoner's dilemma · Coordination game · Chicken · Battle of the sexes · Stag hunt · Matching pennies · Ultimatum game · Minority game · Rock, Paper, Scissors · Pirate game · Dictator game

Theorems

Minimax theorem · Purification theorems · Folk theorem · Revelation principle · Arrow's Theorem

Related topics

Mathematics · Economics · Behavioral economics · Evolutionary game theory · Population genetics · Behavioral ecology · Adaptive dynamics · List of game theorists
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