Repeated games

Definition

Repeated games are strategic interactions in which the same players engage in a game multiple times, allowing for the possibility of strategies to evolve based on past outcomes. This concept is crucial in understanding how players can build reputations, enforce cooperation, and sustain collusive agreements over time, particularly in markets characterized by oligopoly and monopolistic competition.

5 Must Know Facts For Your Next Test

1. In repeated games, players can condition their current strategies on past actions, which enhances trust and encourages cooperation among them.
2. The shadow of the future is an important concept; knowing that they will interact again allows players to consider long-term payoffs rather than just immediate gains.
3. Repeated games can lead to the emergence of cooperative equilibria, where firms may sustain collusion despite individual incentives to cheat in a single-shot game.
4. In oligopoly markets, firms may use repeated interactions to establish tacit collusion, avoiding aggressive competition and maintaining higher prices.
5. The ability to punish defectors by reverting to less cooperative strategies in future rounds reinforces cooperation in repeated games.

Review Questions

• How do repeated games allow players to build trust and foster cooperation over time?
  • In repeated games, players have the opportunity to observe each other's past actions, which helps them develop trust. By using strategies that respond to previous outcomes, such as cooperating when the other player has cooperated, they can encourage a stable pattern of mutual cooperation. This dynamic creates an environment where both parties can benefit from continued collaboration rather than engaging in one-time competitive behavior.
• What role does the shadow of the future play in influencing strategies within repeated games?
  • The shadow of the future refers to the impact that future interactions have on players' current decisions. Knowing that they will continue to engage with each other can lead players to prioritize long-term gains over short-term benefits. This awareness often encourages more cooperative behavior because the potential for future retaliation or reward can significantly alter how players approach their strategies today.
• Evaluate how repeated games might affect price-setting behavior among firms in an oligopoly.
  • In an oligopoly, repeated games can significantly influence price-setting behavior by enabling firms to establish tacit collusion. By interacting multiple times, firms can create implicit agreements on pricing without explicitly communicating. This leads them to set higher prices consistently while avoiding price wars, as they recognize that deviating from this strategy could result in retaliation from competitors. Over time, this repeated interaction helps stabilize prices above competitive levels, enhancing profits for all involved firms.

Related terms

Nash Equilibrium:

A situation in which each player's strategy is optimal given the strategies of all other players, resulting in a stable outcome where no player has an incentive to deviate.

Tit-for-Tat Strategy: A simple and effective strategy in repeated games where a player mimics the previous action of their opponent, fostering cooperation if the opponent cooperates and retaliating if they defect.

Collusion: An agreement among firms in a market to limit competition, set prices, or control output, often leading to higher profits but typically at the cost of consumer welfare.