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JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.We propose a refinement of sequential equilibrium for extensive form games by generalizing a restriction proposed for signaling games in Cho and Kreps (1987).2 The restriction is that beliefs must not assign positive weight to the possibilities that can be excluded through reasonable introspection based on the data available as common knowledge.A new technique is developed in order to prove the existence of forward induction equilibrium, which consists of two steps. First, we establish the generic existence of forward induction equilibrium by exploiting the results of Kohlberg and Mertens (1986). Then, we show that the forward induction equilibrium correspondence is upper hemi-continuous in the outcome space with respect to the changes of parameters of the game.

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We examine a competitive market in which producers and consumers are scattered around the economy, linked by a network with finite capacity, along which the good has to be delivered for consumption. A most prominent example would be the deregulated electric power market. Because of the complexity of transaction across the network, the equilibrium allocation is generally complicated. However, we can focus without loss of generality on a class of allocations, called simple allocations, in which the net transaction over a link is equal to the gross transaction over the same link. If a simple allocation can be sustained by an equilibrium, then the allocation must be efficient. If an equilibrium induces a simple allocation that is no longer sustained by an equilibrium, the original equilibrium allocation is not efficient. For any efficient allocation, we can find a simple allocation that can be sustained by a competitive equilibrium, which reveals the structure of the competitive equilibrium allocations and the equilibrium prices.