Game Theory for Managers

Repeated Games

Dr. Masoud Talebian

Schneiders Mechanics Experiment

leaving town for good: $59.75
would be returning: $37.70

Repeated Games

A repeated game is a game that the same

players play more than once.

We discuss whether threats and promises

about future behaviour can influence

current behaviour.

Finite-Stage Repeated Game

If the stage game has a unique Nash
equilibrium then, for any finite time, the
repeated game has a unique subgame
perfect outcome: the Nash equilibrium is
played in every stage.

Example: Prisoners Dilemma

Player 2
L2
R2
L1

1,1
2,2

5,0
6,1

R1

0,5
1,6

4,4
5,5

Player 1

Infinitely Repeated Game

Given a stage game, consider the infinitely
repeated game in which the game is
repeated forever and the players share the
discount factor. Each players payoff in
is the present value of the players payoffs
from the infinite sequence of stage games.

Friedman Theorem (1971)

Let (e1,,en) denote the payoffs from a Nash
equilibrium, and let (x1,,xn) denote any other
feasible payoff. If xi>ei for every player i and if
discount factor is sufficiently close to one, then
there exists a subgame perfect Nash
equilibrium of the infinitely repeated game that
achieves (x1,,xn) as the average payoff.

The payoffs (x1,, xn) are called feasible if

they are a convex combination of the payoffs.

Reservation Payoff
The largest payoff player i can guarantee, no
matter what the other players do.
Fudenberg and Maskin (1986) show that for
two-player games, the reservation payoffs
replace the equilibrium payoffs in the
statement of Friedmans Theorem.

Example: Prisoners Dilemma

Player 2
L2
R2

L1

1,1

5,0

R1

0,5

4,4

Player 1

Strategy

In the repeated games a players strategy

specifies the action the player will take in
each stage, for each possible history of play
through the previous stage.

Trigger Strategy
Play Ri in the first stage. In the tth stage, if the
outcome of all t-1 preceding stages has been
(R1,R2) then play Ri; otherwise, play Li.

Twin Pillars of Cooperation

1. Intrinsic desire to cooperate, especially if
others are cooperating.
the most secure foundation for a cooperative
relationship.
2. Power to punish others who fail to cooperate.
cooperation can only be sustained if players
believe it can be sustained for a long time to
come.

Tit-for-Tat Strategy
1. Cooperate in round one.
Players cooperate unless one of them fails to cooperate
in some round of the game.

2. Reciprocate after round one

The others do in the next round what the other player
did to them in the last round.

Evolution of Cooperation
Observe who also knows about Tit-for-Tat.
Teach others in your strategic network about
Tit-for-Tats merits.
Play Tit-for-Tat only with those you trust to do
the same.

Collusion between Cournot Duopolists

Produce half the monopoly quantity, qm/2, in
the first period. In the tth period, produce qm/2
if both firms have produced qm/2 in each of t1 previous periods; otherwise, produce
Cournot quantity, qC.

Disrupting Harmful Cooperation

Department Of Justice guaranteed complete
amnesty to the first confessing firm, regardless
of the seriousness of their crimes.

Stop Mafia?
arrest any known mafioso essentially at will
witness protection took the teeth out of the
Mafias practice of punishing traitors.