Infinitely Repeated Games

In an infinitely repeated game, the application of subgame perfection is diff

- after any possible history, the continuation must be a NE
- but after any history each subgame looks like the original game

We cannot use generalized backward induction, because there is no last pe

- the trick is to recognize that each subgame is identical to the who
- this simplifies things since only need to consider the initial game
.

A technical issue: we must discount future payoffs using a discount factor (

- without discounting the payoffs are not finite

Ui

s
t T

t 1

t 1

U i st

t 1

Repeating the one-shot NE is always an

SPNE
Is D in every period still an equilibrium when the game is played infinitley?

i1 D

3, 3

1, 4

D
If (2) plays D always
- then a NE can come from (1) playing D
- everyone playing D always is a SPNE

4, 1

2, 2

n
t
i

t1

In the finite repeated prisoners dilemma game a unique SPNE is {(D,

D), (D, D)(D, D)}
In the infinitely repeated version, there are multiple SPNE as long as players are
sufficiently patient
- one SPNE is always {(D, D), (D, D)(D, D)}
- the existence of other SPNE implies that cooperation is possible
- Cooperation can yield a higher long-run payoff

Infinite prisoners dilemma

One-shot:

unique NE is {D, D}

Finite repeated: unique SPNE {(D, D), , (D, D)}C

3, 3

1, 4

4, 1

2, 2

Infinitely repeated:

Claim: if players are sufficiently patient (if the discount factor is

sufficiently high), then
cooperation can be sustained in a
SPNE in the infinitely repeated game.
1

i C

C if ht 1 C , C ,K C , C ,K
Nash Reversion

1
t 1
- consider the following trigger strategy i h D else

Play C if you have always seen C, otherwise play D.

- if both players follow this strategy, we always observe (C, C)

trigger strategy
Under what conditions is there a SPNE in trigger strategies
Is the trigger strategy a best response for (1) if (2) uses the
trigger strategy?
For the trigger strategy to be a BR for (1):

C
3.

1
3
0

3, 3

1, 4

4,
1

2, 2

4 1 2
1 2

12

Patience matters in infinitely repeated

games
If players do not value the future at all,
the analysis of
repeated games is the analysis of
repeated one-shot games

The Folk Theorem

Using the trigger strategy we can get many different paths

Path of cooperation in even periods and non-cooperation in odd
periods
C , C D, D C , C D, D ...
- then a trigger that goes to D if they ever observe anything
different from this
and we would get DD forever
C , D D, C D, C D, C ...
Path of alternating
C , D C , D D, D D, C D, C C , C ...
Or any other path you can think of

Even if the stage game has an unique equilibrium, there may be SPNE
in the infinitely
repeated game in which no stages outcome
is a NE of a stage game
The Folk Theorem: take a game, play it infinitely often
-if players are patient enough you can get a wide variety of subgame paths
-some paths might require a very high discount rate a lot of patience
-you need further refinements in order to predict behavior

Infinitely repeated Bertrand

2 firms: they play Bertrand each period for an infinite # of periods

-the firms discount future payoffs

The payoff for firm i is Vi t it 0 1

Recall that in the one-shot
t 0 game with two firms P1 = P2 = C is the
unique NE.
- Any NE in the one shot game is a NE in the repeated game

If firm (2) plays P2 = C every period

Then firm (1) gets 0 profits no matter what, so P1 = C is a BR1
P1 = P2 = C is also a SPNE
In the infinitely repeated Bertrand game, many other price paths
are possible
- there are other SPNEs ( a lot of them)
- we will focus on the one in which both players choose the
monopoly price PM

Dynamic Bertrand with tacit collusion

Let pm be the monopoly price

max p c D p
p

Consider the following strategies for price setting duopolists set pi pm in t 1

Each period, charge pm in t 1 if both players always have, otherwise set pi c
-this is a grim trigger strategy or Nash reversion strategy
Players maximizing NPV (discounted) will do this if

from cooperating from defecting

m
1 2 ...

approx
from deviating

0,

1 1

1,
2 1

1
2

Collusion as N rises
Another reason why profits may be higher in industries with fewer firms; it is easier to get collusion
Suppose you have n firms with dynamic price competition. They will collude if

m
1 2 ... m

n
1 1

1,
n 1
As n

if

1 n n ,

n n 1 ,

n 1
1
1
n

becomes more restricted so that firms must be more patient to enforce collusion
as the observation lag decreases (length of period) it is reasonable that
n &

then it gets easier to cooperate

Any pair of profits s. t. 1 0 , 2 0 & 1 2 m is a per-period eqm payoff

that can be supported using the grim trigger strategy for sufficiently close to 1

This is the folk theorem

too many possibilities
strategies

A reasonable focal point

- firms choose symmetric

Too many possibilities exist

- on the frontier so each

gets

2
infinite # of equilibrium payoffs

pareto frontier
focal point

m
0

Anything can happen 1

0
m
m
1

Because there are so many equilibria

2
Using SPNE alone we cannot predict what is to happen in infinitely
repeated games
Any price between the marginal cost and the monopoly price can be
sustained
Any payoffs in the triangle can be the average per period payoffs in a
SPNE
- if players are sufficiently patient they can use a Nash
reversion strategy
- anything beats getting zero forever

Cournot with Nash reversion

In Cournot, there are also SPNE with trigger strategies
- firms can tacitly collude
- what keeps it up is the prospect of future gains

Average per period payoffs, that can occur in SPNE in i

repeated game, using Nash revision, if sufficientl

qc
0

qc

Minimax payoffs

Defn: Let i =min max i qi , qj

qj

qi

denote player i 's minimax payoff.

- denote the NE choices in the stage game by q*

q1*, q2 * .

Defn: Payoffs that strictly exceed i for each player i are individually rational payoffs.

1, 2

element by element
greater than

1, 2

Folk Theorem: General Result

For any feasible pair of individually rational payoffs 1, 2 ?

1, 2

there exists a < 1 such that for all > , 1, 2 are the average payoffs
arising in a SPNE.

Cournot with Non-Nash reversion

What does non-Nash reversion strategy look like?
2

The Folk Theorem states that the only lower

bound on payoffs in an infinitely repeated
game when players are sufficiently patient is
given by the minimax payoffs (rather than the
Nash eqm. Payoffs)

anything in here

One player can force

the other to the minimax payoffs

In Cournot, the minimax payoff is zero

Infinitely repeated games pose problems for analysis
- because of the infinite # of equilibria it is difficult to
predict the path of play
- it is difficult to perform comparative statics
- we can explain anything; the analysis does not add much
value

Using infinitely repeated games

One response is to ignore repeated game considerations

(1) focus on simple dynamic games
(2) assume players repeat a one-shot NE when it has intuitive proper
Another response is introduces a state space
- assumes players strategies are a function of the current state, not
- value functions with Markov perfect equilibria
- this removes history dependence

A third response is to use the insights to explain conditions under which co

-.make standard assumptions such as players are rational
- find restriction on parameters that make cooperation possible

This repeated PD strategy has only one period of memory; players

Tit
for Tat
cannot carry a grudge
Strategy (TFT):

t=1
t>1

Cooperate
Cooperate if opponent played C in

period t 1
Defect if opponent played D in period t
1
This is not equilibrium analysis
There are some good properties of TFT
1) nice starts out cooperating, never initiates defection
2) simple easy to follow, easy for opponent to understand
3) forgiving after D, it is willing to cooperate again if
opponent does
4) provocable never lets cheating go unpunished
Axelrods experiments: he collected strategies for computerized
Prisoner Dilemma games
- In a round-robin tournament each strategy played every other
strategy.
- TFT was the winner.
- Nevertheless, a simple defect strategy will always beat TFT, but