Presentation Title - Indiana University

Presentation Title - Indiana University

Game Theory II Repeated Games Managerial Economics Kyle Anderson Repeated Games Does the outcome of a game change if the game is played multiple times? Repeated games: Multiple players Simultaneous moves Perfect information Game to be repeated: Finite number of times Infinite number of times Kyle J. Anderson Repeated Pricing Game Perry low price Perry high price

Anderson low price 0, 0 40, -30 Anderson high price -30, 40 10, 10 What if this game were to be played 5 times? Repeated Prisoners Dilemma Perry low price Perry high price

Anderson low price 0, 0 40, -30 Anderson high price -30, 40 10, 10 The NE in a one-time game is low-low (Prisoners Dilemma). Repeat game five times. Backward induction: what will happen in the fifth game?

Work backwards In any finitely repeated game, the NE of each playing is the same as the NE of the one time game. Infinitely Repeated Prisoners Dilemma If a Prisoners Dilemma game is repeated an infinite number of times, is there another Nash Equilibrium? A. No, the Nash Eq. of the one time game is just repeated forever. B. Yes, firms should always cooperate. C. Depends on the Federal Reserve. Infinitely Repeated Prisoners Dilemma Trigger Strategy: Anderson will cooperate (high) in the first period. In the second period, cooperate if Perry cooperated previously. If Perry plays low, then

play low forever after. Perry low price Perry high price Anderson low price 0, 0 40, -30 Anderson high price -30, 40 10, 10

Should Perry play the same strategy? Infinitely Repeated Prisoners Dilemma Trigger Strategy: Anderson will cooperate (high) in the first period. In the second period, cooperate if Perry cooperated previously. If Perry plays low, then play low forever after. Perry low price Perry high price A low price

0, 0 40, -30 A high price -30, 40 10, 10 Perrys Payouts: Cheat (low) first period: 40 + 0 + 0 + 0 Trigger Strategy: 10 + 10 + 10 + 10 Is 10 + 10 + 10 + 10 > 40 Infinitely Repeated Prisoners Dilemma Perry low price Perry high

price A low price 0, 0 40, -30 A high price -30, 40 10, 10 Trigger Strategy: cheat coop 1 coop Nash i

Perrys Payouts: (40-10)/(10-0)<1/i 3 < 1/i If the interest rate is less than 33.3%, the Trigger Strategy is a Nash Equilibrium. Franchising: an application Business Traveler trying to find a hotel: Stay Dont stay Hotel decent quality Hotel low quality 5, 5 0, -5 -10, 10

0, 0 Cheat: 10, Coop: 5, NE: 0 If the Interest rate is less than 100% then it is better to provide decent quality. Kyle J. Anderson cheat coop 1 coop Nash i Can Cooperative Pricing Occur: Standardized pricing High market concentration Reaction speed and detection lags Information about transactions Number of buyers Volatility of demand High firm symmetries Price sensitivity of buyers

Kyle J. Anderson Big Finish Finitely repeated games Infinitely repeated games have other NE if the interest rate is sufficiently low. In practice, cooperation is harder due to a number of reasons. Kyle J. Anderson

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